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Post Office Board Agenda
Present th Attendance Apologies
24" November 2016 + Tim Parker ( Chairman) I + Alwen Lyons None
+ Richard Callard + Martin Edwards (item 4 & 6)
+ Tim Franklin + Martin George (item 6)
Start Time Finish Time
]
I
11.15hrs 15.15hrs * Virginia Holmes _ + Mark Siviter (item 6)
* Ken McCall I + Nick Kennett (item 7)
+ Carla Stent I * Angela Van Den Bogerd (item 8)
Room 1.19 Wakefield + Paula Vennells I * Rob Houghton (item 8)
I
+ Alisdair Cameron
Agenda item Action Needed Purpose lead Timing
1. Minutes of previous Board and Decision Minutes formally agreed. Alwen Lyons 11.15-11.20
Committee meetings including
Status Report
2. CEO Report For noting CEO to update the Board on the report. CEO 11.20 - 11.50
Including IR update and Christmas
Campaign
3. Financial Report For noting CFO to update the Board on results. CFO 11.50 - 12.10
4. Update on Funding Process (verbal) —_ For noting CFO to update Board on latest progress CFO / Martin Edwards 12.10 - 12.30
5. Board Effectiveness Review For noting To familiarise the Board with the Board Alwen Lyons / Ken McCall 12.30 - 12.50
Introduction Effectiveness review process.
6. Mails Update For noting To update the Board on progress made since Martin George / Mark 13.20 - 14.05
June on Post Office and Royal Mail joint strategy, Siviter / Martin Edwards
next best alternative, negation preparation and
strategy.
7. Update on Project Peregrine and For noting To update Board on Project Peregrine and Nick Kennett 14.05 - 14.20
report from POMS Board provide a half year POMS performance and
strategy update.
Back Office Transformation 14.20 - 14.45
For Board to review / approve the Back Office Angela Van Den Bogerd /
Transformation Business Case. Rob Houghton
For approval
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Agenda item
Action Needed
Purpose
9. The acquisition of Broadband For ratification To ratify the decision taken by correspondence. Alwen Lyons 14.45 - 14.50
Customers from New Call
10. ‘Items for noting 14.50 - 14.55
10.1 Sealings For noting Board aware of the affixing of the seal.
10.2 Health & Safety For noting To update Board
10.3 Date of next meetings For discussion To confirm Board dates for future meetings
11. Board Committee Chair verbal For noting To update Board Committee Chairman 14.55 - 15.10
updates
- ARC, NomCo, RemCo & POAC
12. AOB 15.10-15.15
CLOSE 15.15
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POLB 16(8")
POLB 16/62 - 16/74
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.30am on 25 October 2016
at 20 Finsbury Street, London EC2Y 9AQ.
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive
Alisdair Cameron Chief Financial Officer
In Attendance:
Alwen Lyons Company Secretary
Martin Edwards Director of Strategy (Minute POLB 16/66 and POLB 16/67)
Mark Davies Corporate Affairs Director (Minute POLB 16/66)
Nick Kennett Group Financial Services Director (Minute POLB 16/67)
Rob Houghton Chief Information Officer (Minute POLB 16/67)
Jonathan Hill Head of Risk, Banking, Regulation and Strategy, Financial
Services (Minute POLB 16/67)
Owen Woodley Sales Director (Minute POLB 16/67)
Chrysanthy Pispinis Financial Services Corporate Development & Governance
(Minute POLB 16/76)
Neil Hayward Group People Director (Minute POLB 16/68)
Natasha Wilson Director of Reward and Pensions (Minute POLB 16/68)
Apologies: None
POLB 16/62 INTRODUCTION
(a) The Chairman noted that a quorum was present and opened the
meeting.
(b) The Directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the
Company's articles of association.
POLB 16/63 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE MEETINGS
INCLUDING STATUS REPORT
Minutes
(a) The minutes of the Board meeting held on 29" September 2016
were approved as an accurate record and the Chairman was
authorised to sign them.
(b) The Board noted the Action Status Report.
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(c) The Board discussed Action POLB15/50 (b) and the effect of
classifying the closure of the Supply Chain external work as
discontinued business and therefore an exceptional item in the
accounts. The Board recognised that the work had been discussed
at the time of budget setting and acknowledged that it would have
been inappropriate to include it in any budget before the consultation
with employees had been concluded.
(d) The Chair of the Remuneration Committee stressed the need for
transparency when setting the bonus targets and assessing
performance against those targets. The CFO would continue to
disclose the exceptional charges at the ARC and he assured the
Board that any effect on the EBITDAS would be transparent to the
Remuneration Committee.
POLB 16/64 CEO REPORT
(a) The CEO introduced the CEO Report, focusing on the following key
points:
(b) Period 6 Results: Performance continued to be challenging and
although the CEO remained reasonably confident that the full year
EBITDAS target would be delivered, the gross income trend
remained a concern.
(c) Pensions: The CEO updated the Board on the decision of the
Pensions Trustee to accept the proposal to close the Post Office
Section of the RMPP on the 318' March 2017. She thanked Virginia
Holmes for her support.
(d) Industrial Relations: The CEO reported that the CWU and Unite
unions had called for strike action on the 31% October. The Board
was assured that contingency plans were in place to ensure there
would be as little adverse effect on customers as possible. The CEO
explained that discussion continued with the unions but that there
would likely be further strikes in the run up to Christmas.
(e) I POca: The CEO explained that the details of the supplier contract
would be presented at the November Board meeting. The Board
asked the CEO to ensure that a wide range of options for payment
provider be considered.
(f) Apprentices and Graduates: The CEO updated the Board on the
presentations she had received from the apprentices and graduates
who had recently joined the Business. The standard was excellent
and she was excited by both their enthusiasm and their focus on the
commercial and social purpose.
(g) Mails: The CEO explained that the Mails team was continuing to
engage with the RMG whilst looking at the next best alternative
strategy. The Board was nervous about the RMG delaying the
discussions and the CEO assured them that should deadlines be
missed she would escalate the matter with the CEO of the RMG.
Ken McCall reported his meeting with the Mails team and the need
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to test the viability of alternative solutions. It was understood that the
Mails strategy would be discussed at the next Board meeting.
Transformation Report
(h) The Board noted the Transformation Report. Transformation risk
would now be included as a standard agenda item for the ARC and
the Board asked that the ARC specifically consider:
ACTION: e The aggregated cost and burn rate compared with
David Hussey business cases and budgets; and
¢ The impact of IR35, ‘off payroll’ working, the impact and
risk mitigation.
(i) The Board noted the CEO report.
POLB 16/65 FINANCIAL REPORT AND UPDATE ON THE DEVELOPMENT OF THE
P6 RESULTS.
(a) The CFO introduced the Financial Performance Report for Period 6,
September 2016. The CFO was forecasting that the Business would
hit the EBITDAS target for the year, but good Christmas trading
would be key to delivering the £-10 million.
(b) Cash flow headroom had not improved as predicted in P6 as
additional cash had remained in the network after the strike
contingency planning. However this position had been recovered
during P7.
(c) The Board discussed the Working Capital Facility and the
opportunity to reduce the cash strain on the Government as part of
the funding negotiation. The CFO explained that the most difficult
areas to manage were coin distribution and Foreign Exchange cash.
However if postmasters were incentivised to change their behaviour
this could facilitate another change in supply chain demand and free
up cash to use elsewhere.
(d) The CFO explained the additional pressure on the 2017/18 target of
£28m, which would flow into the baseline for the strategy and funding
plan. The Board agreed that it was important to have a realistic
ACTION: CFO baseline for the plan, and asked the CFO to provide trend income
analysis in the Financial Reports to enable the Board to monitor
the income streams. The Board recommended that the 2017/18
budget should be realistic and based on flow through from the
2016/17 operational outturn, with initiatives to deliver the
contingency to get back to the £28m target.
(e) The Board approved the P6 Income Statement, Balance Sheet,
Cash, Headroom and Forecast positions
(f) The Board noted that external supply chain activities have been
reclassified as discontinued operations subject to Ernest Young’s
(EY) agreement.
(g) I The Board agreed that from P7 Actuals v Forecast comparisons
would be monitored.
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POLB 16/66 STRATEGIC PLAN TO 2020/21 AND FUNDING REQUEST
(a) The Chairman welcomed Martin Edwards, Director of Strategy and
Mark Davies, Corporate Affairs Director, to the meeting.
(b) Martin Edwards presented an overview of the 2020/21 strategy,
explaining the financial consequences of the counterfactual case as
opposed to achieving commercial sustainability through funding a
major cost base restructure.
(c) The Board discussed the proposals and stressed the need to
strengthen the explanation and narrative behind the counterfactual
case and to include ranges within the projections.
(d) The CEO recognised that because of the good work done to date in
delivering Network Transformation, and the current stability of the
network, it would potentially be difficult to persuade Ministers that
there was still a cost base crisis which needed to be addressed.
(e) The Board asked for assurance that the necessary evidence was
available to support the funding case. The CFO explained that the
Group Executive had worked though and agreed the assumptions in
the plan, which were supported by market analysis and business
cases. The BEIS team had employed KPMG to review the funding
request and Martin Edwards would work closely with Richard Callard
and his team to present the case.
(f) The Board discussed the revenue projections and agreed that the
business had to aim to be sustainable without relying on FS growth.
ACTION: The Board asked Martin Edwards to consider how the size of
Martin Edwards the network could be used to deliver income through an access
fee, similar to that for paid for the banking framework or identity
products.
(g) The Board recognised the uncertainty within the income projections
included in the plan, but stressed that the cost base remained more
in the control of the business. The funding narrative needed to make
it clear that it would be impossible to change legacy IT systems and
reduce the cost base without funding support from the Government.
(h) The Board discussed the segmentation of the network into
commercial and social branches and possible changes to how these
could be funded. It recognised that product simplifications and a
reduction in postmaster remuneration would put pressure on some
postmasters, but believed that there could be an opportunity to
restructure the franchise to sell it more as a footfall generator.
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(i) The Board agreed with the four success criteria set out in the
narrative document, namely that by supporting funding the
Government would secure:
« Agrowing, flourishing network — although not with any binary
network number to hit;
e Permanently lower funding;
« Indispensable service to customers and communities; and
e Options on ownership — without referring to a mutual option.
(j) It was recognised that there would need to be more detail in the
funding request with analysis on £320m investment and the resulting
deliverables. The Board advised that the funding request had
different audiences and would require different explanations to align
with their priorities accordingly. The Board recommended that
greater focus be given to SME customers.
ACTION: (k) The Board supported the direction and funding proposal and
Martin Edwards asked for more information on the investment and returns to be
presented at the next Board meeting.
ACTIONS: (l) The CEO suggested that Martin Edwards could provide
Martin Edwards additional information on a one to one basis if any Board
member required.
(m) The Board approved the strategic plan to 2020/21 and funding
request prior to submission to the Government in early November.
(n) Mark Davies left the meeting.
POLB 16/67 FINANCIAL SERVICES GROWTH STRATEGY
(a) The Board welcomed Nick Kennett, Group Financial Services
Director, Jonathan Hill, Head of Risk, Banking and Strategy
Financial Services, Chrysanthy Pispinis, Financial Services
Corporate Development and Governance, Owen Woodley, Sales
Director, and Rob Houghton CIO to the meeting.
(b) Nick Kennett reminded the Board of the strategic direction for Post
Office Money (POM) approved at the June meeting, with the
interdependent key components of:
« The New Normal customer proposition;
e The ‘Strong Integrator’ business model; and
e The re-negotiation with the Bol.
(c) Nick Kennett stressed that the FS strategy meant a change to focus
on the customer relationship and lifetime value, and a move away
from the primary delivery in branch to a digital channel. He added
that the delivery of the strategy required a significant change in how
the business was run, with enhanced capabilities, risk management
and governance structures, changed relationships with suppliers
and partners, supported by agile technology.
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(d) Nick Kennett explained that investment, which had been included in
the wider 2020/21 strategy plan and funding, would be required for
IT development in support of the new model. The ClO stressed that
the investment should focus on delivering one product at as low a
cost as possible to test the proposition with both customers and
revenue earning protection. Further products could then be added
incrementally. The ClO believed that the initial investment could be
around £8-10m but needed further definition as it depended on the
product chosen and the level of systems integration required with
the product provider. The Board supported this initial investment.
(e) Nick Kennett confirmed that the overall funding request was £72.3m
over five years, of which £37.4 related to capex. This investment was
targeted to deliver gross income in 2020/21 of £156m and EBITDAS
of £68m, an increase of £30m. The overall NPV was £181m over
five years.
(f) The Board asked for assurance that the development would not
complicate the IT transformation currently underway. The ClO
assured the Board that the system would be developed separately
and only integrated into the Post Office systems if tests proved it
could be incorporated without causing issues.
(g) The Board agreed to plan to make the full investment as proposed,
depending on the success of the initial investment, and discussed
the most appropriate structure and governance for its delivery.
(h) Nick Kennett advised that the paper did not include recommended
changes to the organisation structure and regulatory position as this
had not been discussed at GE. CS explained that, based on her
experience with FinTech companies and major banks, for this new
business to work effectively the Board and management should
think in a new way, enabling a separate innovation hub supported
by people and a new governance environment. Ring-fencing the
team working on the business development would assist faster
change, particularly if the project deployed a compartmentalised,
“test and learn” methodology. There was support of this from across
the Board.
(i) The Board discussed the FS sales model and the move from
Financial Specialists in Directly Managed branches to a CRM model
training postmasters’ staff to use a portal and tablet to capture
customer data. Owen Woodley explained that the CRM model was
underway as a trial which would need to prove it was profitable for
the business and the postmaster.
(j) The Board supported the recommended options and direction of
travel principles in relation to technology structure, the distribution
model and the shape of the funding and emphasised to the
executives that it would be important to build momentum into the
change programme.
(k) Nick Kennett, Martin Edwards, Owen Woodley, Jonathan Hill,
Chrysanthy Pispinis and Rob Houghton left the meeting.
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POLB 16/68 PENSIONS VERBAL UPDATE
(a) The Chairman welcomed Neil Hayward, Group People Director, and
Natasha Wilson, Director of Reward and Pensions, to the meeting.
(b) Neil Hayward updated the Board on the decision taken by the
Pension Trustee to accept the proposal to close the DB pension plan
on the 31%' March 2017. He reported that the approach to the
consultation had been validated by the Pension Regulator.
(c) Face to face briefings were now planned to explain to DB scheme
members the summary of the consultation; what would happen to
the surplus after the current valuation; what the move to the DC
scheme would mean to members; and the next steps in the process.
A pensions’ website was also being launched where members could
access information.
(d) Natasha Wilson reported that the scheme valuation should be
available in the first two weeks of November and this would help to
make the position clearer for members.
(e) Natasha Wilson explained that a Governance Committee was being
set up to give oversight to the DC scheme and that she was working
with the Chairman of the DB Trustees to identify an independent
ACTION: trustee to invite onto this committee. Richard Callard asked to be
Natasha Wilson kept updated on the establishment of the Governance
Committee.
(f) The Chairman thanked Natasha Wilson on behalf of the Board.
(g) Neil Hayward and Natasha Wilson left the meeting.
POLB 16/69 UPDATE FROM BOARD COMMITTEE
(a) Remuneration Committee _(RemCo)
The Chair of the RemCo updated the Board on the meeting held on
the 29" September 2016.
« He reported that PwC had been appointed as the new
Remuneration Committee Advisor.
« The CEO had recommended that the Group Executive
should receive a pay award of 1.9% similar to the rest of the
Business, which the RemCo had noted.
«The STIiP target for the CEO and CFO bonuses, which had
been agreed with the last Government Minister, had now
been further delayed by the Ministerial change. Because of
this delay the RemCo had decided that it would not be
advisable to ask for a recalibration of the LTiP target for
2016/17 as it was now too late to do so.
e Neil Hayward would be presenting the timetable for future
bonus target submission at the November Committee.
(b) Nomination Committee (NomCo
The Chair of the NomCo updated the Board on the meeting held on
the 29'" September 2016, at which the Committee had discussed the
Group Executive succession plan.
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POLB 16/70 ITEMS FOR NOTING
Sealings
(a) The Directors resolved that the affixing of the Common Seal of the
Company to the documents numbered 1451 to 1453 inclusive in the
seal register was confirmed.
(b) Future Meeting Dates
The Board noted the future meeting dates.
(c) Health and Safety
The Board noted the Health and Safety report.
POLB 16/71 CLOSE
(a) There being no further business, the Chairman declared the meeting
closed.
(b) The Board attended a session presented by Linklaters covering,
‘The changing regulatory environment — The impact of the senior
manager and certification regime, on the Financial Services sector.’
Chairman Date
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POLARC 16(6")
POL ARC 16/41 - 16/53
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 2.30 pm on 28" September 2016 at 20 Finsbury Street, London EC2Y 9AQ
Present: I
Carla Stent Chair I
Richard Callard Non-Executive Director (RC)
Tim Franklin Non-Executive Director (TF)
Ken McCall Non-Executive Director (KM)
In Attendance:
Paula Vennelis Chief Executive, (CEO) i}
Alisdair Cameron Chief Financial Officer (CFO) I
Jane MacLeod General Counsel (GC) I
Nick Kennett Financial Services Director and CEO of POMS (NK)
Alwen Lyons Company Secretary (CoSec)
Mike Morley-Fletcher Head of Risk and Assurance (MMF)
Paul Hemsley Financial Controller (PH)
Peter Mclver Ernst & Young (PM)
Elena Belyaeva Ernst & Young (EB) /
Kevin Gilliland Network and Sales Director (KG) (Minute POLARC 16/42 to I
16/44)
Jonathan Hill Head of Risk, Governance and Development (JH) (Minute
POLARC 16/42 to 16/44)
Owen Woodley Sales Director (OW) (Minute POLARC 16/42 to 16/44)
Amanda Bowe POMS, Non-Executive Director and Chair of POMS ARC (AB)
(Minute POLARC 16/42)
Susie Hayward POMS, Head of Risk and Compliance (SH) (Minute POLARC.
16/42)
Gordon Gourlay Bol, Managing Director of Post Office Businesses (GG) (Minute
16/43)
Alec Hughes Bol, Head of Post Office JV Compliance (AH) (Minute 16/43)
Rob Houghton Chief Information Officer (RH) (Minute POLARC 16/48)
Tim Parker Post Office Chairman (TP) (Minute POLARC 16/43 to 16/50)
POLARC 16/41 INTRODUCTION
(a) A quorum being present, the Chair opened the meeting. The
directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the I
Company's articles of association. I
POL ARC, 28" September 2016 1
Strictly Confidential
(b) The Chair welcomed attendees from Post Office (POL) and Post
Office Management Services (POMS) who had joined for the
Financial Services discussion.
FINANCIAL SERVICES
POLARC 16/42 POMS
(a) POMS ARC Report. AB presented the report from the POMS
ARC and highlighted the good progress made over the last year
to put in place a Risk Management Framework, the high level
“policies, and a process for reporting any incidents or breaches.
Going forward, POMS would focus on deploying the Risk
Management Framework.
(b) The POMS ARC recognised the importance of the relationship
between POMS and POL as its Appointed Representative (AR)
and the need to ensure both entities worked together to deliver
the required improvements and compliance.
(c) The Committee noted the report from the POMS ARC dated
13 September 2016.
POMS as Principal
(d) NK reported the recent FCA thematic review on ARs in General
Insurance and its applicability to POMS’ oversight of POL.
(e) He explained the role of POMS as a regulated entity and its
regulatory responsibility for POL as AR regarding the sale of
General Insurance products. Travel Insurance and over 50’s
Life Insurance were the products carrying the greatest conduct
risk as these were sold across the wider branch network.
(f) NK explained that the compliance risk of the POL Network was
the highest risk on the POMS Risk Register and rated adverse
to appetite. While there had been no indication of systemic
customer detriment from sales through the POL network, it was
a regulatory requirement that POMS should be able to provide
evidence and quality assurance from POL in relation to POL’s
own compliance with contractual and regulatory requirements
and its conduct risk framework. This included evidence that
agents and those of their staff who sold POMS products had
been appropriately vetted and trained. A new Horizon IT control,
which would enable POL to limit user access, and which had
been anticipated for delivery by POL in January, would be
delivered later.
(g) KG supported the introduction of the user access control.
(h) The ARC recognised the obligations and responsibilities of POL
as AR and the challenges of providing evidence of compliance
when selling the product through a large network.
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(i) The ARC stressed the importance of implementing the new
control to manage user access and the Chair asked the
POMS CEO to provide a report setting out the timeline and
ACTION: NK actions to deliver the requirement.
(i) The Chair thanked AB for her report and assured her that the
ARC would continue to monitor delivery of the AR
accountabilities
(k) AB and SH left the meeting.
POLARC 16/43
ACTION: OW
IRRELEVANT I
ACTION: JH
POL ARC, 28" September 2016 3
ACTION: GC
(h)
@
Strictly Confidential
appropriately structured to encourage the right colleague
behaviours.
The ARC noted that Jane MacLeod, the GC was the 2™ and 3"
lines of defence for the branch network. The GC explained that
this was not inappropriate in an immature business and could
be helpful in developing the appropriate culture. The Chair
suggested this be reviewed in the longer term.
A review the 2" and 3” lines of defence in the Post Office
Money branch distribution model to be undertaken in
autumn 2017/18.
The Chair thanked GG and AH for attending the meeting and
recognised how well the relationship had developed.
GG and AH left the meeting.
POLARC 16/44 POL Financial Services
(a)
(b)
(c)
(d)
ACTION: NK
(e)
NK recognised the long term strategic relationship with Bol and
the joint work on risk and compliance. This had been particularly
focused on the oversight of the Financial and Mortgage
Specialists; the compliance performance of these teams had
improved considerably over the past two years from a position
where Bol had been very concerned and had threatened to
withdraw sales unless improvement could be demonstrated.
NK stated that he was less comfortable with the compliance
position in the agency Network, where inevitably there was
limited direct oversight. This was of particular concern for POMS
as Travel Insurance and Over 50s Life Assurance were sold
over the counter in the wider Network. While there was no data
that would indicate that customers were not receiving
appropriate products or guidance, the nature of the network and
the lack of user identification did not enable POMS to have the
level of comfort that it required — hence the concerns raised by
the POMS Board and ARC.
NK explained that to reduce the risk POMS has decided to sell
Over 50s Life Insurance from only c.1,000 branches as part of
the implementation of a new product supplier in January. He
further explained that if POL was unable to deliver end-user
identification, the POMS Board would need to consider whether
travel insurance should also be withdrawn or at least restricted
— a position that would significantly reduce customer benefits
and POMS’/POL’s financial outcomes.
The ARC asked POMS to consider developing a similar
dashboard to that produced by Bol to facilitate POL’s
reporting to the ARC on the KPIs POL should monitor in
regard to its role as AR to POMS. Ideally this reporting
would be quarterly.
KG, JH and OW left the meeting.
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POLARC 16/46
ACTION: MMF
POLARC 16/47
POLARC 16/48
Strictly Confidential
MINUTES OF THE MEETINGS HELD ON 2574 JULY 2016
(a)
The minutes of the meetings held on 25 July 2016 were
approved as presented and the Chair of the Committee was
authorised to sign them as a true record,
POLICIES FOR APPROVAL
(a)
(b)
Investigations
The ARC approved the Investigations Policy.
Physical Security
The ARC approved the Physical Security Policy.
Financial Crime Policy
The ARC approved the Financial Crime Policy subject to the
alteration to include ‘possible prosecution’ as an outcome for
failure to comply.
Amend the Financial Crime Policy to include possible
prosecution as an outcome for failure to comply.
INSURANCE RENEWAL FOR RECOMMENDATION TO THE
BOARD
(a)
(b)
PH explained that the cover being proposed included a high
level of deductibles which meant that POL self-insured up to that
level. The ARC asked if consideration had been given to
complete self-insurance. PH explained that this had been
considered and would be considered every year before renewal.
NK suggested that once POMS was more established it could
look at offering insurance to POL.
The Committee recommended the renewal as set out in the
brokers’ report, for submission to the Board for its approval.
BOUNDARY/PERIMETER CONTROLS
FINANICAL REPORTING UPDATE
(a)
(b)
The Chair welcomed Rob Houghton, Chief Information Officer
to the meeting.
Financial Control Framework (FCF
The CFO updated the ARC on the progress being made to
develop the FCF. He said that the methodology being deployed
was entirely appropriate to financial reporting and could be
extended to other areas. The CFO explained that the majority
of finance processes had now been mapped and gaps
identified. The ARC asked for priority to be given to remediating
the higher risk gaps disclosed in the CFO report, such as
segregation of duties, and the CFO concurred. By year-end
gaps would have been mitigated, at least on a work-around
basis, controls self-assured and testing undertaken.
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(d)
(e)
ACTION: @)
PM/CFO
(9)
(h)
)
@
ACTION:
MMF/RH
ACTION: &)
David Hussey
Strictly Confidential
The CFO reported to the ARC that after discussion with the
Chair, the Shareholder and the External Auditors, a decision
had been taken not to produce Interim Accounts for the current
year. The resource saved would be used to focus on ensuring
that relevant controls were in place by the year end. EY audit
work would be accelerated but without duplication. EY and POL
were considering the need to repeat additional year-end
routines as the controls would not have been in place for the full
financial year.
The CFO noted that the controls and assurance of the accuracy
of the declared cash in the Network was under review.
The CFO explained the Finance System upgrade currently
being scoped relied on SAP for income reporting and would
eliminate the need to use multiple spreadsheets and feeder
systems. A detailed paper and business case for this investment
in SAP would be presented to the Board in November. The ARC
recognised the improvement that this change could bring but
were concerned about the time and investment required and
stressed that the implementation of the new system would be
key.
The proposed External Audit plan would be presented to
the November ARC meeting.
The Committee noted the progress made.
Controls Assurance
The CFO reported on the controls in place to give assurance to
the budget and funding requirement. He explained that UKGI
had engaged KPMG to provide assurance as to the funding
application. PM reported that EY had been approached to bid
for the work but that they would decline due to conflicts of
interest.
Risk Management Framework
MMF presented the Risk Profile and explained the changes
since the last report. The Industrial Action risk had improved
significantly despite the strike called by the unions. The CEO
explained that the effect of the strike had been well managed
and the Group Executive supported the reduced risk.
The ARC were surprised that the risk associated with IT
transformation and its effect on the flexibility to change systems
and controls was not included in the risk profile.
The ARC requested that this risk be added in the future.
The ARC agreed that Transformation risk needed more
scrutiny and asked that it be included in future agendas
and reports.
The Committee approved the 2016/17 Half Year Group Risk
Profile.
POL. ARC, 28" September 2016 6
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Strictly Confidential
POLARC 16/49 IT CONTROLS
(a)
ACTION: Rob
Houghton
(b)
(d)
(e)
(g)
(h)
End to End Control Framework and Cyber/IT Security
RH explained his plans to create an end to end control
framework for IT and the work underway to map the IT
landscape. This work would map the current state against the
necessary controls and required protections.
A paper would be presented at the November ARC outlining
the proposed IT control framework and the plans for its
implementation.
RH recognised the need to strengthen the IT team and
introduce people with expertise in IT security operations. He
assured the ARC that these appointments were underway. This
would bring the skill necessary to develop an IT security
operations centre with the right detection systems and capability
to monitor any IT security issues.
RH recognised that the current status of Cyber Security and
Information Assurance were outside the Board risk appetite in
three key areas as described in the paper. He admitted that he
would remain nervous until he could see the whole IT
environment in one place rather than being fragmented between
suppliers.
The Chair updated RH on the ARC discussion on system
changes required by POMS to introduce controls to limit Horizon
user access. RH assured the ARC that he was aware of the
required IT- changes and was working with the network and
training team to deliver them as soon as possible.
The ARC noted the paper on Cyber/IT Security,
Horizon Lessons Learned
The CFO explained that Fujitsu and Oracle had been unable to
determine the root cause of the Horizon systems failure but the
same failover/failback exercise which had caused the initial
failure had now been replicated successfully. It was believed
that the problem had been caused by the memlock processes
which had now been reconfigured.
The ARC was concerned that the root cause of the Horizon
failure had not been identified, and that the business incident
escalation processes had not worked. The GC explained that
changes had been made to address the deficiencies in business
continuity and a Business Protection team was now in place
with ongoing training and testing for different scenarios. The
incident escalation process would continue to be developed and
tested.
One of the issues highlighted by the Horizon failure was the
inability to communicate quickly with the Network. Standard
communications had now been prepared with a separate
communications channel should the Horizon system become
unavailable.
POL ARC, 28" September 2016 7
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@
Strictly Confidential
The Committee noted the paper and commented on the lessons
learned.
RH left the meeting.
POLARC 16/50 BRANCH CONTROLS
(a)
(b)
(c)
(d)
(e)
(h)
BCV Lessons Learned
The CFO introduced the lessons learned paper and highlighted
the actions taken since the fraud had been reported to the ARC.
He stressed that management actions had already been taken
concerning the BCV fraud before it was reported to the ARC but
recognised that enhanced reporting was required and was now
in place. Greater transparency would mean more issues would
be reported but these issues were usually caused by non-
compliance or unintentional mistakes. The tighter controls being
put in place would help reduce the losses through early
intervention and, where possible, recovery.
The ARC applauded the transparency and recognised the work
underway to enhance reconciliations and increase
interventions. However they asked if those responsible for the
lack of escalation had been made accountable. The CEO
teported that changes to the senior leadership had taken place.
The Committee noted the paper and the verbal update.
TP left the meeting.
AML/CTF Framework
The GC updated the ARC on the HMRC AML/CTF audit. The
work had been slightly delayed and would be reported to the
November ARC along with finalised actions, dates and
accountabilities.
The Committee noted the status of the HMRC audit and the
initial draft findings of the Risk Assessment work.
Policies for Board Approval (AML and ABC)
The ARC recommended the Anti-Money Laundering and
Counter Terrorist Financing Policy, for submission to the Board
for approval
The ARC recommended the Anti-Bribery and Anti-Corruption
(‘ABC’) Policy, for submission to the Board for approval.
POLARC 16/51 QUATERLY AUDIT REPORT
(a)
(b)
MMF presented the Quarterly Audit report and explained that
although the audit programme was slightly behind plan it was
expected to catch up during the remainder of the year,
The ARC asked MMF to prioritise the review of IT governance.
POL ARC, 28" September 2016 8
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(c)
POLARC 16/52 ITEMS FOR NOTING
(a)
(b)
(c)
(a)
Strictly Confidential
The ARC noted the paper.
The ARC noted the report on Business Continuity planning.
The ARC noted the Contact Management paper.
The ARC noted the Horizon Scanning paper.
The ARC noted the Property paper.
POLARC 16/53 ANY OTHER BUSINESS
(a)
(c)
The CFO reported that Postal Services Holdings Company
Limited (PSH) was planning to sign its report and accounts on
the 3 October. The accounts would contain a subsequent
event note on IRIS and would note that a letter before action
had been received on 22" September in relation to notice of
termination which had been given in respect of a 3” party
contract in Supply Chain.
The GC explained that a letter before action claim had been
received relating to the Supply Chain withdrawal from the
external market. The letter claimed an abuse of a dominant
market position, and alleged that withdrawal could have an
adverse impact on Somali communities. The legal team was
dealing with the letter, however there was a risk of adverse
publicity.
There being no further business the Chairman closed the
meeting.
POL ARC, 28% September 2016 9
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Strictly Confidential
Status Report as at:
Post Office Limited Board
17/11/2016
ACTS
‘Owner
ie Date
[STATUS
uly 2016 POLB IPost Office Card Account (POca) Procurement Division IMartin George [January 2016 IPOca to return to the Board in January. (Open
16/41 (h) MG assured the Board that the work on digital wallet POL Board
would be accelerated and aligned with the wider digital
strategy promised to keep Board updated.
uly 2016 POLB [Post Office Card Account (POca) Procurement Division [Carla Stent POLARC on [On the agenda for November ARC (Closed
16/41 (i) ARC to pick up the risks concerned with the transfer of 17th November
POca accounts (Court order part 7) and CYSC8.
uly 2016 POLE [Technology Strateay CIO January 2017 (Open
16/47 (g) The Board asked the CIO to update the principles
highlighted in the paper to ensure they were business
focussed; based on reducing costs; were clear on
security; and improving customer journeys.
july 2016 POLE IUpdate from Board Committees (verbal) - Remuneration. [CFO POL Remco in [Following discussions at September Board and with the [Closed
16/50 (b) Committee November JARC and RemCo Chairs, the year-end process is clear.
Rigour would be needed to ensure the accuracy of the
2016/17 EBITDAS outturn, as it would drive the LTIP &
STIP bonuses. The Chair of RemCo asked if the external
jauditors should be asked to sign off that bonuses had
been earned. It was agreed that the CFO would prepare
ja RemCo paper on this issue.
September 2016 ICEO Report: FRES Acquisition of AMEX Nick Kennett [January 2017 (Open
POLB 16/54 (f) _IFRES strategy to be presented to the Board in January. POL Board
September 2016 INetwork Strategy and Funding 2017-21 Martin George November 2016 IThe Government Services team has asked UKGI / BEIS IClosed
POLB 16/57 (i)
The CEO agreed to look at an opportunity to offer a
service to the NHS for drug distribution through post
offices in rural communities.
Board
for support to identify a suitable contact with the NHS.
team leading this initiative to better understand the
[transformation plan and assess a potential role for POL.
See annex 1 to actions for full update.
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25 October 2016
POLB 16/64 (h)
atic 101
[Transformation risk would now be included as a standard
[agenda item for the ARC and the Board asked that the
ARC specifically consider:
+ The aggregated cost and burn rate compared with
business cases and budgets; and
/* The impact of IR35, ‘off payroll’ working, the impact
land risk mitigation.
David Hussey [November 2016
POL ARC
On the agenda for November ARC.
25 October 2016
POLB 16/65 (d)
Financial Report and Update on the Development of the
P6 Results - Strategy and Funding Plan
The CFO to provide trend income analysis in the financial
reports to enable the Board to monitor the income
streams.
Al Cameron January 2017
Board
Open
25 October 2016
POLB 16/66 (F)
Strategic Plan to 2020/21 and Funding Request
The Board asked Martin Edwards to consider how the size
lof the network could be used to deliver income through
lan access fee, similar to that paid for the banking
framework or identity products.
Martin Edwards
Will be considered as part of future contract
negotiations including with RMG. Banking framework
already includes a fixed fee componenet.
(Closed
125 October 2016
POLB 16/66 (k)
Strategic Plan t Funding Reque:
[The Board supported the direction and funding proposal
land asked for more information on the investment and
returns to be presented at the next Board meeting.
Martin Edwards [November 2016
Board
[Verbal Update on the funding process at the November
meeting. Additional briefing papers available in POL
Board reading room on Boardpad.
Closed
25 October 2016
POLB 16/68 (e)
Pensions Verbal Update
Richard Callard asked to be kept updated on the
lestablishment of the Governance Committee.
Natasha Wilson
(Open
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PAGE 1 OF 1
POST OFFICE
BOARD
Action Update
Author: Martin George — Meeting date: 24 November 2016
Executive Summary
Context
This update supplements the information provided in the Board action list, specifically
in relation to the following matter:
September 2016 Network Strategy and Funding 2017-21 Martin
POLB 16/57 (i) The CEO agreed to look at an opportunity to offer a George
service to the NHS for drug distribution through post
offices in rural communities.
Input Sought
The Board is requested to note the update.
The Report
The Government Services team has worked with the Network team to review this
opportunity.
Background
The NHS currently has a plan to deliver £22bn in the period from now to 20/21. Within
that is approximately £1bn of savings relating to rationalising the pharmacy network
throughout the UK, reducing the number of pharmacies (which are heavily funded by
the NHS) from the current 11,600 by approximately 1,500-3,000.
The key components of the NHS transformation programme are:
e to increase uptake of digital services to provide more direct to the door delivery
of repeat prescriptions from pharmaceuticals companies and click and collect
services at pharmacies; and
e to integrate the health system, moving many pharmacies into GPs surgeries and
care homes, and to rationalise the current pharmacy network model into a local
hub and spoke model where hospital pharmacies act as a hub for local GPs
surgeries and pharmacies.
This proposed integrated hub and spoke model with delivery to door/click and collect
certainly offers opportunities to logistics/courier firms, but at the moment NHS has not
indicated any desire to step outside its own estate for the click and collect solution.
It is worth noting that any move by POL to deliver a click and collect solution for
pharmaceuticals would involve:
e investment in suitable refrigerated secure storage;
Board November 2016
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« introduction of a new compliance/regulatory regime around handling of
pharmaceuticals and potentially provision of advice as they are dispensed and
investment in related training; and
* a potential increase in risk of robbery.
Next Steps
The Government Services team has asked UKGI/BEIS for support to identify a suitable
contact with the NHS team leading this initiative to better understand the
transformation plan and assess potential role for POL.
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POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: November 2016
Executive Summary
Context
Our goal for 2016-17 is to achieve Our 3 year goals are:
EBITDAS of (£10m). 1. To accelerate the transformation
of Post Office.
2. To secure commercial
sustainability for the long term
3. To establish a business that can
ultimately fund investments and
the social purpose from profits
rather than subsidy.
In summary, our strategy is to secure our position as the UK’s number one
parcels and letters retailer, grow in financial services and protect our network
and social purpose — all supported by a much leaner central organisation.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
1. EBITDAS in P7 was £(1.1)m, £1.4m favourable to budget. EBITDAS YTD
was £(14.3)m,£1.6m favourable to budget. However, gross income in P7
was £0.3m adverse to budget reflecting challenging trading conditions.
2. Discussions with Government on our funding proposals continue and we are
seeking ministerial engagement.
3. We are also continuing to discuss the current dispute with our trade unions.
However, it is unlikely that we will be able to resolve the dispute with the
CWU in particular in the near future. We are planning for further industrial
action before Christmas.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
Confidential
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The Report
Looking Back
¢ Financial Performance - P7
— P7 EBITDAS was £(1.1)m; £1.4m favourable to budget. YTD EBITDAS was
£(14.3)m; £1.6m favourable to budget.
— Income in P7 from Mails and Financial Services was £0.5m and £0.8m
favourable to budget respectively.
— Expenditure in P7 of £(82.1)m was £0.5m favourable to budget. YTD
expenditure of £(531.8)m was £4.8m favourable to budget.
¢ Customer Measures
— All of our customer measures performed at or ahead of target in P7.
Specifically:
o Effort scores continued to perform well achieving 75%, in line with YTD
performance and 7pp ahead of target.
o NPS was +66, in line with YTD performance and 1 point ahead of target.
Customer Satisfaction was 84%, in line with YTD performance and target.
o Wait Time Acceptability was 93%, 1pp ahead of YTD performance and 4pp
ahead of target.
o FS NPS was +30, 1 point ahead of YTD performance and ahead of target
(+28).
e Supply Chain
— Phase 1 of the implementation of Project Iris progressively covering 10 sites
went live on 24 October.
— The project is on track and on budget with routes and duties agreed;
equipment and vehicles in place; 291 Settlement Agreements signed (15
pending); and work underway on exiting sites due for closure.
— Service performance against revised routes is monitored daily and all depots
are performing well, achieving standards in excess of 90% consistently with
some achieving 100% from the outset.
— Phase 2 covering a further 14 sites will go live on 30th January 2017.
e Industrial Relations
— As previously reported, our contingency plans for the day of industrial action
on 31 October worked well.
— Turnout was again much lower than historical turnout in previous strikes by
either Union (22% of represented employees).
Confidential
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— 99% of the Post Office network was open for business. We opened 218 out of
299 Directly Managed Branches (up from 187 on 15 September) and all our
supply chain depots bar one (Glasgow CVIT) were open.
Media coverage was very low key.
All industrial action is regrettable and we are conscious that changes we are
implementing are difficult for affected colleagues. However, we believe the
rationale for change is understood and that our regular, direct communication
with colleagues is having a positive impact.
4d
e Charity Ball
— The 2016 Post Office Charity Ball took place on 3 November. Over 1,000
people attended including suppliers, partners, Post Office heroes, POAC
members and colleagues.
— We are awaiting the final total but we know that over £140,000 was raised for
BBC Children in Need.
« Financial Performance - P7
— Gross Income in P7 of £88.0m was £0.3m adverse to budget. Gross income
YTD of £560.1m was £7.5m adverse to budget.
— Some long term negative trends continued through P7, including Lottery
which was £1.0m adverse to budget.
e Power Outage (Chesterfield)
— Our office in Chesterfield - Future Walk - experienced a significant power
failure on Tuesday 8th November and was forced to run on emergency back-
up for over 24 hours; including some loss of service in our contact centres
while the issues were addressed.
— Our operational response was good and a repair to key components of the
electricity supply to the building (including the 11,000 volt transformer) was
completed on 11 November. An assessment of whether a full replacement is
required is being undertaken.
— Nonetheless, we are conducting a review of our response and how we could
improve in areas including communication to other parts of the business.
Looking Ahead
: ITIES?
e Funding
— Discussions with UKGI on our funding proposal are continuing.
Confidential
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POST OFFICE PAGE 4 OF 6
— An outline timetable for official level discussions has been agreed for the
various stages of the process including conversations with the European
Commission; and discussions with KPMG (covering e.g. the baseline proposition
and strategy overlays) commenced this week and are expected to go on for a
fortnight.
— In addition, I have written to Margot James seeking an early meeting to discuss
our proposals. I will keep the Board informed of progress.
e Christmas Marketing Campaign
— The marketing team have developed an innovative digital marketing campaign
which has been rolled out and will continue through the Christmas peak.
— Ihave invited them to share this with you at the Board meeting.
¢ Parliamentary Activity
-» There is a debate on 17 November in Westminster Hall on the future of the Post
Office. Margot James will be responding for the Government.
— Although the debate is inspired by the CWU, we have been working with the
team in UKGI to turn it into an opportunity to highlight the progress the
business has made since separation; our importance to communities across the
country; and raise awareness of our future strategy.
— In addition, we are planning to hold a drop-in session for MPs in Parliament on
30 November focussed on raising awareness and support for our strategy and
the banking framework in particular.
« Network Consultation
— BEIS launched its ‘Network Consultation’ on 8 November with a request for
responses by 21 December.
—» The consultation is designed to assist the Government to ‘understand
consumers’ and businesses’ expectations for what the network should look like’
in order to inform its work on the ‘future funding of the Post Office network’.
Undertaking this exercise now will also assist in ensuring clearance of EU State
Aid requirements for any future funding.
— The consultation exercise asks whether respondees agree that the current
network access criteria should be generally retained; seeks views on provision
in remote communities; and asks about future service offers together with the
role that communities can play in the Post Office network.
— At the same time, BEIS also published a report from YouGov and London
Economics on ‘The Social Value of the Post Office Network’. This academic
study (based on a 5000 responses from households and 750 from SME’s)
confirms the significant and ongoing social value that these groups ascribe to
the network and its services (the lowest of three valuations calculated yields a
figure over £4bn per year).
Confidential
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e Industrial Relations
—> Although the business managed the last day of industrial action well, there is
little sign that we will be able to resolve the dispute with the CWU in the near
future. We are anticipating further industrial action before Christmas.
— Nonetheless, we continue to have discussions with both Terry Pullinger and
Andy Furey in an attempt to find a way through the current impasse.
— I have also written to Terry Pullinger to invite him and other CWU
representatives to come to the GE meeting on 22 December to talk about our
strategy and vision; and for them to share their vision for the future of the
business. We await a response.
— More positively, discussions with Brian Scott (Unite) suggest that there may
be scope to resolve the dispute with them. They have presented us with a
broad range of requests that would allow them to settle the dispute. Whilst
we could not agree to them all, there does appear to be scope for negotiation
and compromise without diverting from our strategy. I will keep the Board
informed of progress.
° POca
—> Further to the update in last month’s report, we have continued to investigate
the options for addressing TSB’s withdrawal from the procurement process.
> As part of our working through the detail of the proposed e-money solution
HPE’s banking partner, TrustPay Global (TPG) has recently presented their
solution to the FCA, who have objected to a number of aspects of the
solution.
— They were particularly concerned about the classification of the accounts as
‘payment accounts’. Reclassifying the accounts would require £40m in capital
adequacy to be set aside. HPE are considering other aspects of the FCA’s
response and are due to come back to us shortly with a re-assessment of the
feasibility of the e-money solution.
> It now seems most likely that we will need to contract with JPM to provide the
service to be co-terminus with our contract with DWP. JPM are contractually
obliged to continue to deliver the service and will be under pressure from the
regulator to continue to provide the service to customers.
> JPM are able to update their prices if we extend. They have agreed to provide
us with detailed pricing for this option in December. We have shared the new
services contract with them, as both parties have agreed that it would be
preferable to update the terms under which the service is delivered. It is likely
that negotiations will continue into the New Year.
Confidential
POST OFFICE
In Conclusion
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The business remains ahead of target for
_ the year. However, trading conditions are
challenging and we will need to carry the
momentum from P7 into the Christmas
Peak.
The business responded well to the latest
_ day of industrial action and support
amongst colleagues was relatively low.
However, resolution with the CWU
appears no closer. More positively,
discussions with Unite suggest that there
may be scope to resolve the dispute with
them.
Confidential
Significant challenges lie ahead in
achieving our financial targets especially
given the impact of external factors on
our income projections.
We will also continue to face challenges
in managing our industrial relations.
However, our approach of engaging
colleagues directly and supporting them
through change is working. We will
continue to invest time and resource on
engagement activities.
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October 2016
Financial Performance
Al Cameron
24 November 2016
©
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P7 and YTD Performance ahead of Budget
Context
. P6 EBITDAS £(2.0)m off budget (YTD £0.2m ahead) highlighting a difficult income trend.
. Forecasting £(10)m EBITDAS for full year
. P6 £235m additional cash in Network, balance sheet headroom £36m.
Questions
. How is our scorecard performance in P7 and YTD?
. What is the financial performance of the business in P7 and YTD?
. Are we forecasting year-end outturn to be on budget?
. Are we appropriately funded?
Conclusions
. EBITDAS was £1.4m ahead of budget in P7 (YTD £1.6m).
. Of this £0.7m was underlying performance, £0.5m was due to one offs mainly Telco and the remaining £0.2m was
related timing.
. We are forecasting to meet our £(10)m) full year EBITDAS target before discontinued operations, subject to
Christmas trading.
. Balance sheet headroom improved in P7 by £107m to £143m, returning half of the contingent cash from the network.
Input Sought
The Board is asked to note the financial performance.
(2)
ar
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& The Executive Scorecard is largely positive notwithstanding
pressures on income, footfall and attendance
. P7 YTD Full Year I 2015-16
Key Performance Indicators Act Target Var. Act Target Var. Target I Audited
Growth
‘Total Gross Income (excl NSP) £m 88.0 88.3 560.1 567.6 (a7 984.0 981.1
EBITDAS £m (100% bonus) (1.1) (2.5) (14.3) (16.0) (10.0) I (24.0)
Headroom £m (vs Board minimum limit )~ 343 200 343 200 200 485
Digital Net Income £m (digital team) 3.3 3.6 QB 23.0 22.4 39.9 21.8
Customer
Customer Effort 75% 68% 75% 68% 68% 67%
Net Promoter score 66 65 66 65 65 63
Acceptable Wait Time % 93% 89% 92% 89% 89% 79%
Branch Compliance - Financial Services - basket of 11 measures 20 <=50 21 <=50 <=50 26
Footfall (weekly) m (customer sessions from Horizon) 10.60 11.06 10.52 10.92 11.14 11.14
People
Line Manager Engagement Index % (Once a year March) * YTD Score 68% 68% - 68% 68%
Internal senior manager appointments (3A and above) 63% 50% 38% 50% ee 50% 14%
Representation (Senior Managers) - Gender 35% 37% 35% 37% 37% 35%
Attendance 95.9% 96.7% 96.6% 96.7% 96.7% 96.8%
Modernisation
Number of branches (one month in arrears) Same as YTD 11,645 11,500 >=11,500] 11,643
NT Branches Transformed In Year (Bonus Gateway 900) 135 77 848 777 1,075 1,904
~ Actuals include £200m retained for prudence.
* Measured annually in March with a ‘Pulse survey’ due in September.
Attendance — in period impact across Supply Chain and Crowns
Post Office Limited ~ Commercial in Confidence
P7 showed an improved performance £1.4m ahead of budget
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P7 YTD Full Year
Period Variance YTD Variance
£m Actual to Budget Actual to Budget Budget
Gross Income 88.0 (0.3) 560.1 (7.5) 984.0
Cost of Sales (10.2) 1.1 (66.4) 4.6 (120.0)
NET INCOME 77.8 0.8 493.8 (2.9) 864.0
Expenditure (82.1) 0.5 (531.8) 4.8 (909.8)
FRES - Share of profits 3.2 0.1 23.7 (0.3) 35.8
EBITDAS (1.1) 1.4 (14.3) 1.6 (10.0)
Versus prior year, EBITDAS was £1.6m ahead (YTD £11.5m),
This includes no change of accounting for discontinued operations (slide 7).
Of the period net £1.4m:
+ £0.5m one off, mainly Fujitsu cost of sales rebate,
+ £0.2m is net timing (favourable non staff and agents pay offset by averse staff cost), and
+ £0.7m was therefore period performance and relates to lower agents pay and cost of sales.
©
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a Favourable trading in Mails and Financial Services offset by
weaker Lottery and Supply Chain.
P7 YTD Full Year
Period Variance YTD Variance Budget
Gross Income (£m) Actual toBudget Actual to Budget
Mails 31.0 0.5 189.9 1.7 329.6
Retail & Lottery 4.1 (1.0) 24.5 (4.0) 49.2
Financial Services 27.0 0.8 177.1 (2.7) 313.9
Government Services 9.6 (0.3) 70.2 2.7 116.0
Telecoms 13.5 0.2 78.8 (4.7) 141.1
Supply Chain 2.3 (0.8) 16.5 (1.2) 29.8
Other 0.6 0.2 a2 0.6 4.3
Total Gross Income 88.0 (0.3) 560.1 (7.5) 984.0
Cost of Sales (10.2) 1a (66.4) 4.6 (120.0)
Net Income 77.8 0.8 493.8 (2.9) 864.0
* YTD performance continued to be strong in Mails, weak in Retail & Lottery.
. Financial Services had a stronger performance in Insurance and Savings, close to budget on an
underlying basis and supported by £0.9m of phasing benefits in banking and payments.
. Telco after one-off cost of sales saving, arising from Fujitsu rebate.
. Discontinued Supply Chain income starting to show the (unbudgeted) impact of Iris.
”)
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Cost favourable overall with headcount reduced by 605
(10%) YTD
P7 YTD Full Year
Period Variance YTD Variance
£m Actual toBudget Actual to Budget Budget
Staff Costs (20.5) (0.9) (135.7) 0.6 (226.4)
Agents Pay (35.3) 0.8 (227.0) 1.2 (391.1)
Non-Staff Costs (26.3) 0.6 (169.1) 3.0 (292.3)
Total Expenditure (82.1) 0.5 (531.8) 4.8 (909.8)
. Staff Cost increases are driven by phasing and the YTD figure remains favourable.
. Agents Pay savings reflect lower income through the network, with lottery shortfalls having a
particular impact and some phasing.
. Non staff Costs — underlying £1.2m favourable, some phasing benefits from Christmas marketing,
offset by additional provisions on losses and HMRC AML issue of £2m.
. Headcount of 6,000 is 257 lower than P6 and 605 lower that the start of the financial year.
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Against forecast we had a good month with favourable phasing
P7 YTD Full Year
£m Period Variance YTD Variance Q2
Actual toF'cast Actual to F'cast Forecast
Gross Income 88.0 2.5 560.1 0.6 964.5
Cost of Sales (10.2) 0.8 (66.4) 1.2 (117.5)
NET INCOME 77.8 3.4 493.8 1.8 846.9
Expenditure (82.1) (0.3) (531.8) 2.2 (892.3)
FRES - Share of profits 3.2 0.1 23.7 (0.3) 35.4
EBITDAS (1.1) 3.2 (14.3) 3.7 (10.0)
Discountinued adjustment
(Subject to E&Y) 1.1 1.1 7.9 7.5 12.9
Potential EBITDAS 0.0 4.4 (6.8) 11.2 2.9
. Of the £3.2m, £2.0m was trading largely in Government Services, £0.9m was phasing in Financial
Services and £0.5m is one time Fujitsu credits in Telco, offset by £(0.3)m in net expenditure. Overall
£1.7m trading benefit in the period.
. We are on target to meet £(10.m) EBITDAS subject to Christmas trading in particular.
. A detailed technical paper has been provided to E&Y to assess the accounting treatment for Iris.
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We continue to underspend on CAPEX and exceptionals
P7 YTD Full Year
£m Period Variance YTD Variance Q2
Actual toBudget Actual to Budget Forecast
EBITDAS (1.1) 1.4 (14.3) 1.6 (10.0)
Depreciation (0.0) 0.1 (0.3) 0.3 (0.8)
Network Payment 7.7 (0.0) 47.7 0.0 80.0
EBIT pre exceptionals items 6.6 1.5 33.1 1.9 69.2
Interest 0.4 (0.0) 0.9 (1.4) 3.8
Discontinued Operations 0.0 0.0 0.0 0.0 0.0
Impairment (7.8) 6.7 (56.0) 51.3 (180.0)
Exceptionals (incl BT & VR) (12.8) 7.7 (85.3) 20.0 (173.0)
Government Grant Utilisation 11.7 0.0 81.7 0.0 140.0
Profit/(Loss) On Asset Sale 0.0 0.0 17 1.7 0.0
Total Profit/(Loss) Before Tax (2.0) 15.9 (23.8) 73.6 (139.9)
. interest costs YTD have increased reflecting the increased levels of network cash.
. We are underspending in period and YTD due to the timing of programme delivery.
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‘ Network cash has reduced by £121m from P6 but remains
£185m higher than year end
Balance Sheet
March ‘i
£m Oct 2016 2016 Variance I The P7 Balance Sheet variances to March 2016 year end are:
pixed assets 334 4n8 (136) * Debtor variance of £126m comprises decreases of £62m
Cash 850 712 138 in the card account and ATM client debtors.
Creditors (648) (684) 36 ; ,
Pension (deficit)/surplus 195 196 (1) + Network cash has increased by £185m since March 2016
Provisions (162) (167) 5 but reduced from £959m in P6 to £838m in P7, £121m
Other 7 7 (e) of contingency funding has been returned, leaving
Loan (607) (465) (142) c.£110m of contingency and c.£4m seasonal supply in
Net Assets 73 138 (65) the Network.
[Capital and Reserves I _73 138 (65) I . Creditor balances have decreased by £36m, client
Network Cash creditors decreasing by £70m and business creditors
March , increased by £34m.
£m Sept 2016 I Oct 2016 2016 Variance
Retail, Cash Centres 783 689 534 155 * While the agents’ compensation liability has reduced by
Bureau 123 105 74 31 payments made, there are new provisions in relation to
Cheques, debit cards 53 45 45 (0) the discontinuing of the external Supply Chain business.
Network Cash 959 838 653 185
Cash not in Network 20 12 59 (47) * The loan balance movement is consistent with the cash
Total Cash 979 850 712 138 flow in month, net of bank deposits.
Balance Sheet Headroom
March
— Sept 2016 I Oct 2016 I _2016 + Balance Sheet Headroom has reduced from March 2016
Loan city 3 8 es due to the Loan balance increasing to fund the
Loan drawndown ia) (02) {88) comparatively higher Network cash, Balance sheet
Headroom _ Headroom has improved £107m since P6 from cash
Target minimum 200 200 200 returned from the network.
Headroom above target 36 143 285
(9)
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P7 Cash outflow of £(188)m and Net Debt of £595m driven
by higher Network Cash
Cashflow Oct 2016 cash outflow of £(188)m for P7 is £(104)m adverse to budget
Em Actual Budget Variance I arch :
EBIT after discontinued pr 31 10 (10) + Network cash is £(114)m adverse entirely due to retained
operations sj
Working Cantal an ie an 5 contingency prefunding the network.
Client Balances 1 23 (22) 21 .
Network Cash (185) (71) (114) (32) + Client balances are £(22)m adverse to budget due to a number
Capital Expenditure (56) (107) 51 (180) of smaller variances across our client portfolio the largest of
Government funding 172 172 ° 220 which were Santander, UKPA and Bank of Ireland.
Exceptional Items (140) (164) 24 (268)
Other (including interest and tax) (11) 15 (26) 6 . a
Operating Cashflow (asa) 785) (104) (238) + The £35m FRES Joint Venture dividend was budgeted for P7
but was actually received on 31 October which falls into P8.
This adverse variance is in other items.
» These adverse movements were partially offset by capex which
Net Debs audited is £51m favourable and exceptionals £24m as spending plans
* Debt Match track behind budget.
£m Oct 2016 2016
Net increase/(decrease) in cash and cash equivalents 138 (409)
‘Add/(deduct) movement in cash in the network (185) 55
Deduct proceeds of borrowing from BIS. (142) (155) . .
Net increase in net debt (189) (209) Increase in cash and cash equivalents of £138m equates to the
Net debt brought forward at the beginning of the year (406) (497) ‘
Total net debt carried forward at the end of the period (595) (406) balance sheet variance on Page 9.
Net debt consists of: Net debt of £595m is £189m higher than the start of the year,
BIS oan (607) (465) largely driven by funding higher network cash.
Cash (excluding cash in the Post Office network) 12 59
Total net debt carried forward at the end of the period (595) (406)
(40)
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POST OFFICE PAGE 1 OF 1
BOARD NOTING PAPER
Board Effectiveness Review (BER)
Author: Alwen Lyons Sponsor: Ken McCall Meeting date: 24 Novernber 2:
Executive Summary
Context
In last year's Annual Report and Accounts, a commitment was made to carry out an
external BER in the financial year 2016/17. This was discussed at the Board and
delegated to the Nomination Committee to deliver.
The work has been procured from Lintstock Ltd., a company recommended by Ken
McCall, Senior Independent Director, and will take place between the November 2016
and January 2017 Board meetings.
Lintstock Ltd., will use an online questionnaire to produce both a quantitative and
qualitative review, which will be available for the January 2017 Board meeting. Each
Board member will receive a customised questionnaire, depending on their Committee
membership and Lintstock will be available to take verbal input if anyone requires.
The questionnaires will be circulated at the end of November 2016, with full
instructions on how to complete.
The questionnaire relevant to the Board is included after this paper for your
information.
The Group Executive will also be asked to complete their own questionnaires, which
will be included in the review.
Input Sought Input Received
The Board members are asked to note the The Chairs of the Board, ARC,
Board Effectiveness Review in which they Nominations and Remuneration
will be asked to participate in December Committees have all signed off the
2017. questions for respective sections of the
review.
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Board Review 2016: Overview
Board Composition
Q1___ How appropriate is the Board's composition?
Please comment if you feel there are any additional skills which ought to be added to the
Board.
Excellent - Good - Adequate - Poor
Q2_ Please describe the key changes that ought to be made to the profile of the Board over the
next 3 years to match the company's strategic goals.
Free Text Question
Board Expertise
Q3 How well does the Board understand the views and requirements of the following key
stakeholders?
Please comment if you feel the Board's understanding of one or more stakeholder group(s)
ought to develop further.
Multiple numeric scale: rate each of the following from 1 ("Very Poor’) to 5 (Very Good’):-
- The Government
- Customers
- Employees
- Sub Postmasters
Q4 How would you rate the Board's understanding of the company’s product pillars?
Please identify any specific areas in which you feel the Board's understanding ought to
develop further.
Multiple numeric scale: rate each of the following from 1 ("Very Poor’) to 5 (‘Very Good’):-
- Mails and Retail
- Personal Financial Services
- Payments
- Government Services
- Telephony
- FRES
- POMS
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Board Dynamics
Q5 Onascale of 1 to 5 (where 3 is ‘appropriate’) how would you rate the level of involvement of
Non-Executives in the affairs of the company outside Board meetings?
Please comment if you do not feel the balance of Non-Executive involvement is appropriate,
or if you have any suggestions for improving the engagement of the Non-Executives.
Too Little Involvement <— 1 - 2- 3-4 - 5 Too Much Involvement
Q6 How would you rate the quality of the relationships between individual Board members?
Excellent - Good - Adequate - Poor
Q7 How would you rate the Non-Executive Directors’ engagement with management in:
Multiple numeric scale: rate each of the following from 1 ("Very Poor’) to 5 (‘Very Good'’):-
- Providing effective support
- Providing effective challenge
Q8 How would you rate the quality of the relationship between the Board and the Post Office
Advisory Council?
Please comment if you have any suggestions for improving the relationship or
communication between the Board and the Post Office Advisory Council.
Excellent - Good - Adequate - Poor
Q9__- How, if at all, could the atmosphere in the boardroom further encourage equal contribution,
candid discussion and critical thinking?
Free Text Question
Time Management
Q10 How would you rate the planning of the annual cycle of work of the Board?
Please comment if you do not feel that all important issues are covered during the year.
Excellent - Good - Adequate - Poor
Q11 How would you rate the Board's agenda?
Please comment if you don't think that it covers the key issues and/or that the items are not
well prioritised.
Excellent - Good - Adequate - Poor
Q12 How well does the Board review the effectiveness of past decisions and capture any lessons
or actions required?
Excellent - Good - Adequate - Poor
Q13 What, if anything, do you feel the Board spends too much time focusing on?
Free Text Question
Q14 What, if anything, do you feel the Board spends too little time focusing on?
Free Text Question
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Board Support
Q15 How would you rate the frequency of presentations made to the Board by management?
Too Few<-1-2-3-4-5-» Too Many
Q16 How would you judge the quality of the presentations made by management to the Board?
Please comment if you have any feedback for those presenting at meetings.
Excellent - Good - Adequate - Poor
Q17 How would you rate the following aspects of the Board packs?
Multiple numeric scale: rate each of the following from 1 (‘Inappropriate’) to 5 (‘Appropriate’):~
- Length
- Use of Summaries
- Structure
- Timeliness
Q18 Please detail any recommendations for improving the content and format of the various
management reports contained in the Board packs.
Free Text Question
Board Committees
Q19 How would you rate the performance of the Committees of the Board?
Please comment if you feel that the performance or reporting of one or more Committee(s)
ought to improve.
Multiple numeric scale: rate each of the following from 1 (‘Very Poor’) to 5 (‘Very Good’):
-ARC
-NOMCO
- REMCO
- POAC
Strategic Oversight
Case Study: June Strategy Day
Q20 How would you rate the agenda for the strategy day?
Please comment if you don't think that it covered the key issues and/or that the items were
not well prioritised.
Excellent - Good - Adequate - Poor
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Q21 How would you judge the quality of the presentations made to the Board during the strategy
day?
Please detail any recommendations you may have with respect to the quality of the
presentations, or the balance between presentation and discussion during the strategy day.
Excellent - Good - Adequate - Poor
Q22 How would you rate the clarity and articulation of the conclusions reached during the
strategy day?
Excellent - Good - Adequate - Poor
Q23 What would be your top 3 priorities for improving the Board's next strategy day?
Free Text Question
Wider Strategic Oversight
Q24 Ona scale of 1 to 5 (where 3 is ‘appropriate’) how would you rate the involvement of the
Board in determining the strategic direction of the company?
Please comment if you do not feel the Board's involvement in determining the strategic
direction is appropriate, or if you have suggestions for improving engagement in this area.
Not Involved Enough <- 1 - 2- 3-4 - 5» Too Involved
Q25 How effective has the Board been in testing and developing the company's strategy?
Excellent - Good - Adequate - Poor
Q26 In what specific ways do you feel the Board could contribute further to testing and
developing the company's strategy?
Free Text Question
Q27 How good is the Board's understanding of the company's performance relative to its main
competitors in the following areas?
Multiple numeric scale: rate each of the following from 1 (‘Very Poor) to 5 (‘Very Good’):-
- Mails & retail
- Financial Services
- Telephony
- Government Services
Q28 What do you feel are the top 3 strategic issues facing the company over the next 3 years?
Free Text Question
Risk Management and Internal Control
Q29 How would you rate the Board's focus on risk?
Please comment if you have any suggestions for improving the Board's focus on risk or the
structure of risk discussions at meetings.
Too Granular <- 1 - 2-3-4 -5-» Too High Level
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Q30 How would you rate the level of detail provided on risk and reward in papers submitted to the
Board?
Too Little Detail <— 1 - 2-3 - 4- 5» Too Much Detail
Q31 How good is the Board at considering risk when making strategic and operational decisions?
Excellent - Good - Adequate - Poor
Q32 How can the Board improve its performance in risk management / oversight?
Free Text Question
Succession Planning and Human Resource Management
Q33 How would you rate the appropriateness of the structure of the company at Group Executive
level?
Excellent - Good - Adequate - Poor
Q34 Are there any key positions which you think the company lacks or ought to be strengthened?
Free Text Question
Q35 How effective is the Board's oversight of succession plans for the following members of
management?
Please comment if you have any observations relating to the development or succession
plans for management, or suggestions for improving the role of the Board in this area.
Multiple numeric scale: rate each of the following from 1 (‘Inappropriate’) to 5 (‘Appropriate'):~
- The Chief Executive
- The Chief Financial Officer
- The Group Executive
Priorities for Change
Q36 If there was one practice you could bring to the Post Office Board from another Board upon
which you serve, or have served, what would it be?
Free Text Question
Q37 In terms of improving the Board's performance, what would be your top 3 priorities for the
coming year?
Free Text Question
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DECISION PAPER
POST OFFICE BOARD
Mails strategy update
Author: Mark Siviter Sponsor: Martin George Meeting date: 24" November 2016
Executive Summary
Context
The crucial exclusivity provisions which underpin our MDA contract with Royal Mail (RM)
expire in Q4 of FY19/20. This is earlier than the horizon of our five year strategic and
financial plan, which we are setting out to Government together with its associated
funding request. Uncertainty around the cost of securing our long-term sustainability in
Mails is the biggest swing factor in the business’ five year profit projections. It is essential
to secure a sustainable long-term model for our Mails business well before the exclusivity
provisions with RM expire but our optionality reduces and our negotiating position
weakens the later we renegotiate.
In June, the GE and Board endorsed our strategy for securing our long-term future with
RM. We set out the plan to engage RM in a joint strategy project this financial year to
reinforce to them why we are better together and why we must act to renew the
relationship for the long-term. Our intent remains to drive a renegotiation with RM next
financial year. In June we also set out how we would develop a business plan for our next
best alternative, as leverage and contingency, and deliver “no regret” moves within the
bounds of the MDA to improve our position.
Questions addressed in this report
1. How have we progressed with Royal Mail since we set out our approach at June’s
Board meeting? What have we learned and how does that impact our plan?
2. What have we done since June regarding development of our next best alternative?
What have we learned and how will this influence our strategy towards Royal Mail?
3. How are we improving the chances of our desired outcomes with Royal Mail? What is
our timeline, when are the key decision points, and what are our next steps?
Conclusions
1. Our Mails business is currently trading ahead of budget and Royal Mail have been
actively engaged with us in a joint strategy project since September. This is the first
collective review of our joint strategy in the Mails market since 2012. It has so far
established a common baseline and by the end of this financial year it will establish a
joint, market-relevant, vision of the future together. This is positive but
simultaneously, and of concern, RM are not committing to renegotiate early on a deal
extending beyond 2022, and have tried to limit focus of any changes in the
relationship to the “second half” of the current MDA term. Our chances of securing an
acceptable long-term (i.e. post-2022) relationship before our self-imposed deadline of
March 2018 are currently low. We lose optionality for implementation of acceptable
alternatives the later we conclude a deal with RM. We are therefore doing everything
we can to increase chances of striking a deal next financial year. This will involve
exploiting the contractual right we have under the MDA to engage RM in a “mid-term
review” of the agreement, commencing in May 2017.
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2. We have assessed in much more detail the two “next best alternative” business models
we set out in June. We are now more confident that there is a viable alternative model
for our Mails business, our customers and our postmasters, without such a close
dependency on RM. This will increase the leverage we need and provide contingency.
We are on a critical path to being able to implement this and we anticipate a major go/
no-go decision in November 2017. A “go” decision would have profound ramifications
for both us and RM and so we must exhaust all opportunities with RM before then.
3. We must use the rest of this financial year to: complete a compelling joint strategy
with RM; keep delivering on “no regret” moves which strengthen our position within
the boundaries or silent areas of the existing MDA; further develop our next best
alternative; gather further intelligence on RM’s likely asks in return for a longer term
deal; and model a fully costed negotiating mandate. Our overall timeline remains
unchanged. The next decision point is the March 2017 Board where we will provide a
full progress update on all elements of our strategy, and this is when we expect to
formally recommend a negotiating mandate. Approval of this mandate will involve
choices on the extent of concessions we could be prepared to trade in order to ensure
the long-term security of our Mails business. The position with RM reinforces the
importance of the strategic priorities as set out in the five-year plan to FY20/21 and
the associated funding request. These priorities ensure we keep reducing the costs and
complexity of Post Office Ltd whilst enhancing our distributional capabilities and
strengthening profitable non-Mails income streams.
Input Sought Input Received
Does the Board endorse our GE & Board endorsement of our strategy (June
approach and the next steps as 2016). Ongoing supervision thereafter from the Mails
set out in this paper? Strategy Steering Committee and the GE.
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The Report
How have we progressed with Royal Mail since we set out our approach at June’s
Board meeting? What have we learned and how does that impact our plan?
1. At the end of H1, our Mails net income is trading £1.3 million ahead of budget and on
track to hit a full year reforecast of £332.6m (versus budget of £329.6m). On a like-
for-like basis that outturn will represent a trading income decline of c-1.6% year-on-
year, which is just ahead of the combined Post Office and Royal Mail view that the
domestic and export mails market is in a slow decline at approximately -2% CAGR.
2. Since June’s Board meeting, we have launched the Drop & Go proposition online to
defend small business market share. A MDA Variation agreement has also been signed
with RM. This has delivered us access to discounted pricing for our Drop & Go
proposition; additional protections for Post Office from RM switching volume to their
online channel; and a mutually-agreed rollout of parcels barcoding.
3. Royal Mail have engaged in joint strategy development and since June we have
baselined the scope, plan and governance of this project and fully mobilised it. This is
a crucial mechanism for us to establish a new cross-organisation vision, a competitive
value proposition and a proposed operating model that is sustainable and relevant in
the market. From our perspective, we also see this work as an important mechanism
for Royal Mail to internally prove the case for our “better together” stance, to influence
them away from their own next best alternatives, and to act as a precursor to a
meaningful renegotiation of our long-term future. It also allows us to understand RM‘s
likely negotiating position, and for us to set out a “burning platform” and why awaiting
the MDA-mandated 2019/20 full renegotiation window is too late for either party.
4. This work has got us to an agreement on: a mutually-validated baseline of the market,
the competition, and other relevant external factors; a common set of customer
definitions; and a common view of our combined Mails business’ strengths,
weaknesses, opportunities and threats. Royal Mail are taking the work seriously. They
have committed resource and are attending at least twice-weekly workshop sessions.
They have also appointed their Strategy Director and Chief Customer Officer to the
project's steering committee. The project commenced in September, two months later
than we had wished. It took time for Royal Mail to resource up and for us to negotiate
the full breadth of the scope we desired and baseline a plan with the right level of buy-
in across both organisations. The project is now progressing well and will formally
complete in April 2017, however we anticipate that our most relevant findings will be
available in advance of our March 2017 GE and Board meetings. An executive
summary of the outputs to date is available in Appendix 1. Further detail is available
upon request.
5. We have also been working with Royal Mail to study lessons we can learn from other
winning organisations in the postal and logistics sectors. For example the US Postal
Service’s mobile proposition which allows customers to transact in advance either for
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scanning into self-service kiosks in branch or to shorten the time required at a branch
counter. We have also considered successful but unrelated retailers where physical
attendance in branch remains a fundamental part of the purchasing journey. For
example, 21% of Starbucks purchases in the U.S. are now made via their loyalty
programme app. This has attained over 11 million users, with high levels of customer
intimacy generated from low value purchases, and it crucially offers footfall growth and
queue reduction for the franchisees of Starbucks’ branches.
. Our view is that the MDA contract form and the behaviours it drives have made it
difficult to enable innovation in the product set, customer journeys, business
simplification or interdependent cost reductions on either side during the “first half” of
the MDA (2012-16). The relatively benign market environment which allowed this no
longer exists. The MDA has a provision for a “mid-term review” to commence in May
2017. This contractual opportunity falls almost immediately subsequent to completion
of the joint strategy project. It is our intent to use this provision to its fullest extent.
The provision requires both organisations to meet in good faith, review the agreement
and its operation, and enter into discussions with a view to agreeing amendments to
the MDA and to take into account changes in market dynamics. Discussions have now
commenced with RM on how we set the scope, boundaries, duration, and people
involved for this mid-term review process. We are also taking detailed legal advice to
prepare for this process.
Royal Mail have indicated their preference to use the outputs of the joint strategy work
solely as a precursor to setting the scope and terms of the “second half” of the MDA
(2017-22). So far, Royal Mail do not recognise a need to open negotiations early about
any relationship beyond their own strategic planning timeframe (2022), and have
positively declined the option to do so. Although not confirmed, we expect they could
be considering a short term extension on exclusivity arrangements (e.g. to 2022 rather
than 2020), but with price conditions. Whilst we agree there is ample opportunity to
facilitate a better “second half” of the MDA, such a short and conditional extension
would fall well short of our desired outcomes. It would not provide the long term
security that we and our postmasters need.
. We have seen no indications that Royal Mail are considering or developing some of
their more radical alternative options. Our view of their alternatives remains as we set
out in June and these remain a serious risk to our success. Their alternatives include:
e Stretching the MDA to the fullest extent by shifting volume away from Post Offices
to lower cost channels. We have already learned that RM is developing a mobile
app targeted at the consumer market. This is focused on receiving rather than
sending customers but if it were to eventually enable sales as well it could
establish the start point towards further disintermediation of Post Office and a
future accept-only proposition being available from RM to other retailers. We
believe RM are also giving consideration to eBay integration which would
represent a threat to our own parcel volumes. We are also under pressure from
Royal Mail to support the introduction of delivery confirmation into more of the
product portfolio. If unchallenged, the eBay and delivery confirmation projects
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alone could cannibalise our existing revenues to the order of £16m p.a. While we
meaningfully engage with RM on the topics, we are naturally resisting change on
their desired terms.
e More overt and aggressive moves to shift volume from us. These could include
acquisition of PayPoint, or preparation to introduce doorstep sales by postmen or
more direct sales via delivery offices.
9. There are lots of reasons to believe that it is both Royal Mail’s and our interests that
the Post Office relationship is renegotiated next year. We believe Royal Mail will need
to take on an increasing risk appetite in terms of improving their domestic cost
position. Relatively stagnant domestic growth and Deutsche Post's recent acquisition of
UK Mail (September 2016) will further stress Royal Mail’s position in the highly
competitive B2C segment of the domestic market. We anticipate Royal Mail’s medium
term strategy to focus on growth via further acquisitions in overseas parcels markets;
domestic operational efficiency; and an increased focus on the domestic consumer
proposition. Post Office has the power to be either an enabler or a threat to the latter
two objectives; our goal is to establish a mutually value-accretive basis to help Royal
Mail achieve both.
10. Our initial conversations and research indicate RM’s propensity to engage in a Joint
Venture with us is likely to be low. Culturally, RM favour more transactional contracts,
even in mission-critical relationships such as running their sortation technology. When
they see strategic value in other organisations, they are increasingly making
acquisitions as a means of integrating rather than entering equity partnerships. RM do
not perceive acquisition of Post Office Ltd as a realistic or attractive proposition for
them. Our final contract format, be it transactional, more strategic, or an equity
partnership, will be a key element in negotiation. We intend to use the “operating
model” phase of the joint strategy project to help us persuade Royal Mail of additional
value which could be unlocked via an equity partnership model.
11. We will continue with our plan of seeking a mandate to negotiate from the GE and
Board in March 2017 by which point the joint future vision and value proposition will
have been developed from the strategy project. The critical success factors for any
new deal will be one that:
a) Offers the best in class proposition for our customers.
b) Supports the long-term sustainability of the network and our agent proposition.
c) Delivers profitable income over the long-term for Post Office Ltd; and
d) Adds value to our brand equity.
12.When it happens, we expect a renegotiation to be a trade across at least seven major
dimensions of the relationship as set out below:
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Mails update
13.
14.
15.
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“yy
(3) Duration
Contract format and exgiration
Margin and Exclusivity
Fived, transac
(2) Market retevance of our joint customer prope
Ability to innavate together te baat the cory
Our request for a negotiating mandate will set out a costed position and our start
points, zones of potential agreement, and walk-away triggers. It will also set out our
best understanding of Royal Mail’s likely starting position, zones of potential
agreement, and walk-away triggers. We are already gathering intelligence to build this
understanding, and will continue to do so over the remainder of this financial year. An
approval of this mandate in March 2017 will involve choices on the extent of
concessions we would be prepared to trade in order to ensure the long-term security of
our Mails business.
We need to reserve our option to offer early, time-limited, financial incentives in a
partnership opportunity to Royal Mail in order to achieve our objective of an early
renegotiation on a long-term deal. We believe it would be wrong to deploy this tactic
yet, but believe it more likely than not that we will need to do so early next financial
year, once the joint strategy is completed and when it can be tied to a compelling
vision of our long term future together. Implementation of any such incentive would be
from FY18/19. The affordable level of such an incentive, its conditions (most likely
associated with cost savings), and the context of it within our wider set of deal
objectives, would be brought to the GE and Board for endorsement as part of the wider
approval process for the negotiating mandate.
In conclusion, our overall strategy towards Royal Mail has not changed from the path
we set out to the Board in June. Whilst we cannot mandate that Royal Mail enter into a
renegotiation next year regarding the post-2020 relationship, we are using the tools
we have to influence their position. Some of these are already in use and further tools
are still available to be deployed (such as external stakeholder influencing) to influence
them towards our desired outcomes.
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What have we done since June regarding our next best alternative plan? What have
we learned and how will this influence our strategy towards Royal Mail?
16. We have worked with expert advisors from the logistics market to further investigate
the two alternative business models we set out for assessment:
e Offering other providers access to our sales channel as a “mail supermarket”
e Becoming a provider of mails products in our own right, with our own product set
and contracts let for collection, sortation and delivery services.
17. We believe we could have the most credible and sustainable alternative strategy by
becoming a mails provider in our own right. Implementation would require significant
business change and would not be without risk. It could make Post Office a serious
threat to Royal Mail. Further detail is available in Appendix 2, but in summary our
growing confidence in such a model is driven by our two key conclusions that:
e There is adequate supplier capacity and capability in the UK to absorb our
volumes with a much reduced reliance on RM. In letters for example, our total
volume would represent just 10% of either of Whistl or UK Mail’s current volumes.
Both organisations process, sort, trunk and then and inject letters into RM for final
mile delivery via the regulated Downstream Access market. In parcels, the current
level of market overcapacity is increasing faster as Amazon expands its own
logistics operation and removes volume from other providers. We could expect to
have to work with more than one parcel provider to handle our market-changing
250m annual parcels volume, or we could need one to invest to accommodate
these volumes. In capacity terms, the three largest players outside Royal Mail
already handle 570m parcels p.a. (MyHermes 250m, Yodel 170m, DPD 150m).
e Our initial indicative economics, at the most conservative assumptions,
demonstrate a positive direct product contribution for Post Office of c£100m p.a.
from revenues of £1.0bn-£1.2bn. This compares favourably with the
counterfactual case of reduced RM income in a new deal and a Mails direct product
contribution nearer to £50m p.a. The business would incur new fixed costs in the
region of £25m p.a. while all other costs would be volume-variable, with agents’
pay rates maintained at current levels. These figures do not reflect upside
opportunities, for instance new product and revenue streams from the greater
freedoms we would have to directly partner with Amazon, eBay and other online
retailers. However, implementation planning and risk planning for this strategy is
at a very early stage and will require significant further development before a final
recommendation could be made.
18. We have assessed potential outcomes against the same four success factors that we
will assess any future deal with Royal Ma
Offer the best in class *® We could continue to offer a full spectrum of mails products, with
proposition for our market-leading features.
customers We could continue to price at levels competitive with Royal Mails’
rates across Letters, Large Letters and Parcels, though in some
instances with greater service quality (e.g. tracking).
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© We could take commercial control of product design and pricing,
allowing our own response to customer needs.
© We could reduce customer journey complexity and improve in-
branch experience through our own product design.
¢ However, Royal Mail could take a mutually-damaging approach
towards stamp or first class letter and large letter product
journeys. Estimates are ranged to account for this risk.
Support the long-term © Agents could have a strong mails product portfolio to retain
sustainability of the footfall, even in the face of likely competition from RM.
network and our agent * Low value, high-workload, Royal Mail accept-only volumes could
proposition reduce as Royal Mail set up alternative acceptance channels.
© Branch collections could continue to be made by a single (prime)
provider, with equivalent or fewer segregation requirements.
© Overall complexity could reduce and agents could gain greater
ability to influence the products for their customers’ needs.
Total agents pay could be maintained at current levels should we
choose to, despite reduced overall volume and complexity.
© Transitioning to the new arrangements would be highly challenging
however, requiring new processes, training and ways of working.
Deliver profitable © We anticipate indicative Post Office Mails revenue of £1.0-£1.2bn
income over the long- and a direct product contribution of c£100m p.a. after taking into
term for Post Office Ltd account an initial assessment of the downside risks from Royal
Mail’s response. This is the biggest single uncertainty.
© The Royal Mail response would be powerful, and we could
anticipate them to take overt and aggressive actions to defend
their position (e.g. poaching agents, acquiring PayPoint).
e There are also further upside opportunities which remain to be
assessed including accessing more SME customers and through
working with Amazon or eBay on new propositions.
Add value to our brand © We could continue to operate as the trusted postal retailer on the
high street.
@ We could have more control over the relationship of our brand with
the mails products we sell.
© However, we could be involved in an ugly, and protracted, public
relations battle with Royal Mail.
© Similarly, we could face direct competition with Royal Mail on the
high street.
19. If we wanted to be in a position to deploy such a model in time for a FY20/21 rollout,
we would need to have commenced a process of public procurement with logistics
providers by January 2018. This is after the joint strategy project and MDA mid-term
review window. Moving into a procurement could only ever be considered after having
exhausted all other attempts to secure an acceptable long-term deal with RM.
20.Running such a procurement process is not without legal challenges under the terms of
the existing MDA and we are engaging expert legal advice on this point. We believe the
act of us revealing an intent to the market would cause share price damage to Royal
Mail. That would be certain to provoke an aggressive commercial and legal response.
21. We have also taken expert advice to help assess the feasibility of Post Office taking on
the Universal Service Obligation (USO) in its own right and if this could be
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22.
23.
24.
25.
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advantageous to us in any scenario. We have concluded that Post Office is very
unlikely to become the Universal Service provider in whole or part. This is because:
e There is no opportunity for any change in Universal Service provider until 30
September 2021 and this would be subject to an OFCOM determination.
e We do not have an end to end delivery network, so would not be in a position to
persuade OFCOM beforehand of our ability to deliver the USO requirements.
e It would be financially unfavourable to us, even despite the ability to price products
with VAT exemptions.
Our other alternative- to offer access to our network to a range of providers as a “mail
supermarket”- is not ruled out as a contingency but is considered a less attractive
long-term option. We consider this more likely to be damaging for the agent value
proposition and it would be likely to reduce consistency of the customer proposition
across our network. Not all products could be available in all branches and we would
gain no commercial control over our product set. We would also be beholden to other
parties with low margins who control larger sections of the value chain. Further detail
is available in Appendix 2, where this option has also been assessed against the same
four success factors as above. Our modelling indicates this option as materially less
sustainable with an expected direct product contribution of £25m p.a. compared to the
baseline counterfactual of £50m p.a.
Desk-based modelling and external expert challenge has refined our thinking since
June and increased our confidence in the viability of the option to become a mails
provider in our own right. However, we will need to do much more work in order to
confirm its credibility, deliverability, and to develop a fully costed and mature business
case. Transitioning to such an option would be ground-breaking and challenging. We
would need a greater level of confidence in a) our view of the possible Royal Mail and
market reaction and our resulting volumes from 2020, b) supplier market appetite and
c) the implementation plan and its risks before we could recommend to the GE and
Board to enact such a plan, or even to recommend we reveal any such plans in
development as a negotiating leverage towards Royal Mail.
We also recognise that further development of this business plan could expose further
implementation challenges, or that strategic or market conditions for potential logistics
partners could affect the ability for us to secure partners at the right price. Either way,
further planning and preparation will be essential to preserve optionality and provide
contingency. There is urgency here as we are already close to the implementation
critical path, should we ever wish to implement such a plan.
In conclusion, since June we have significantly increased our understanding of our
alternatives. With further work we expect this to become a) useful leverage and a way
to increase our negotiators’ confidence with RM, b) a mechanism to set a more
demanding walkaway position in our negotiating mandate, and c) a genuine
contingency to keep the Post Office in business in the event of failing to secure an
acceptable deal with Royal Mail. We must invest in further development of this
business plan and associated implementation plan.
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How are we improving the chances of our desired outcomes with Royal Mail? What is
our timeline, when are the key decision points, and what are our next steps?
26. Our desired outcomes with RM, as set out in June, have not changed. These involve:
moving from transactional fees to greater collaboration and value sharing; an income
stream sufficient to ensure our long-term viability and that of our agents; pricing
structures that incentivise RM to maximise volumes through our network; a
relationship over the long-term, preferably perpetual; positive incentives for us to
deliver market leading service; and a product set which provides a breadth of range
and value-added features to help defend against commoditisation.
27.To improve our chances of achieving these outcomes with RM we must now:
a) Complete the joint strategy project between now and April 2017. This is the best
available vehicle to prove the “better together” case, establish the need to act
early, and establish the basis for the long term relationship we would then
negotiate. We will also much better understand the positions Royal Mail will take,
areas of likely agreement and areas of contention prior to formal negotiation.
b) Establish a more direct influencing relationship towards Moya Greene (RM CEO).
We have now agreed with Royal Mail that review checkpoints together with both
CEOs should be introduced during and at the end of the joint strategy project.
c) Develop the full business plan and the implementation plan for the next best
alternative between now and March 2017, in order to ensure we have credible
leverage and a better understanding of its costs, benefits and risks in order to
help set our walk-away position in any negotiation mandate with Royal Mail.
d) Fully document, internally challenge, and align on our primary deal objectives
when taking into consideration the business’ medium term funding position. We
expect more clarity on the funding position over the course of this financial year.
e) Develop a detailed, costed, negotiating mandate between now and March with a
deeper understanding of Royal Mail’s likely starting position, areas of potential
agreement, and our walk-away triggers with respect to our desired outcomes.
f) Exploit opportunities above and beyond executive interactions in order to
influence Royal Mail and their own stakeholders towards our primary deal
objectives. This may require opening a more detailed dialogue with external
stakeholders, including Government, to help influence RM’s position.
g) Continue activities to deliver “no regret” actions which stretch or extend the MDA
in ways that change the landscape from which we will then renegotiate. This
means: further development of our Drop & Go proposition to grow loyalty and
customer insight from small business customers; development of new propositions
to gain greater share in the Click and Collect market; devising a market-leading
returns proposition; and developing the business case for a mails product
proposition unavailable from Royal Mail (e.g. international time-definite delivery)
in order to demonstrate an ability for us to partner with other providers in the
market where doing so is permissible in the MDA.
h) Continue across the whole business to deliver on the strategic priorities as set out
in the five-year plan to FY20/21. This means investing to reduce the costs and
complexity of Post Office Ltd whilst enhancing our distributional capabilities. Aside
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from its wider business objectives, this specifically: further improves our
attractiveness to RM as a partner above their other alternatives; further improves
our ability to move to an alternative Mails business model in the event of being
unable to secure an acceptable long-term arrangement with RM; and further
strengthens other business lines such as Financial Services and Identity to help
mitigate downside risks in Mails and grow other profitable income streams. We will
need to ensure that ministers are aware of the critical link between our funding
request and our time-limited opportunities to prepare for negotiations with RM.
28. We also have the power to generate leverage through antagonistic actions in the
current MDA, for example refusal to work constructively together on assessing or
implementing Royal Mail change requests. That would develop a mutually-destructive
working dynamic and we are not at the point of needing to consider this.
29. There is no material timeline change from that we set out in June. As previously
stated, we expect to return to the GE and Board in March 2017 to seek a negotiating
mandate, and our objective remains to commence a renegotiation with Royal Mail
early next financial year. We anticipate May 2017 to November 2017 to be the window
of our maximum negotiating strength towards Royal Mail. We have the scheduled
contractual mid-term review in May 2017, we expect to have a combined strategy
completed and bought into by both organisations by April 2017 and we will have
gathered additional intelligence of RM’s likely intentions through our work in the
interim. Beyond January 2018, our next best alternative options would lose credibility
(and indeed become un-implementable in the timescales we need) without
commencing any procurement exercise. We can now provide a more detailed view of
our decision path than we did in June, and this is set out in the schematic on Page 12.
30. The most complex decision point that we can see over the next two years is a
November 2017 “go” / “no go” decision on launching a procurement exercise for
logistics partners to support our next best alternative:
e To recommend a “go” decision in November 2017, we would need to have
revealed both our “carrot” and our “stick” to Royal Mail and still have not secured
entry into a meaningful negotiation with confidence in the outcomes we need. This
would mean both time-limited final incentivisation to buy a longer duration
partnership, as well as some element of disclosure to Royal Mail about a “Plan B”
to become a mails provider in our own right, directly competing with them.
e To recommend a “no go” decision to the GE and Board in November 2017, we
would need to have established, and entered, meaningful negotiations regarding a
long term deal. The terms of negotiations and their end point would need to be
set in such a way that we face no erosion of our ability to implement our Plan B.
31.In conclusion, our timeline remains on track but the task ahead is of high challenge
and high complexity. We must deliver a compelling joint strategy together, increase
the scope and pace of development of our next best alternative, deliver on our no
regret moves, widen our influencing strategy towards RM in order to increase our
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POST OFFICE
chances of a desirable settlement in our timelines, and deliver against the wider
business objectives set out in our five-year plan.
Timeline and Decision Path
2076/17 2017118 I 2018/19
Contract requires both carties to
Existing contract
°No Regret maves which
Earliest point:
notice may be received
‘from Ri el intent to
@ MDA exclusivity
2019/20 2020/21 2021/22 «I 20:
Provisions that cease include:
+ RM no longer commtied to
using us for sale and
sccaptance of ts products I yaa expires
= We cen bath target the
‘other's customers
+ We can sel competing
products
formal provisivns fall away
and relationship Aaticipates inoome loss to
Post Office of minimum
£50m pa,
Co-deveinp jcint
strategy
{in progress)
Preferred renegotiation
tmetine
Jan 18: Last availatle point
{0 infite tenders and have
confidence i deliverability
22/23
Post Office has
‘no Mails
business
Existing MOA provisions replaced ty a renegotiated agreement with Roys! Mail
Next Best Alternative
(NBA)
GE and Board
decision
points
=
Ey
3
g
$
i
‘Go! No-go decision on
altback’ te commence
procurement of NBA
a ee
ere
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ST OFFICE PAGE 13 OF 16
Appendix 1: Joint strategy project outputs
The following slides form an executive summary of outputs from the joint strategy project
work to date. Further supporting detail is available in the reading room if required.
Joint strategy: scope and progress
Avsets.
capsbitios
Heads, wie
and profie of
Environment
Phase 1) Share data and a a ee
intelligence - COMPLETE ~s * , f
Phase 2) Establish a common baseline! “ane ae 99 compete ews
Analysis of compernor
Coven set peo we igs our es
-ssqumgbons on te rarsel and competion 808
row wo ean best respon? « COMPLETE
jens, weaknesses, opportuiies arc teats
2 Se
Combines ratysts of PR, anid RIE StrengInS, wenesHENeS, OpseRRUnINE
ans teats
3) Vielon and offer of fubare apie vsi0n Sor out pin tunes ana uncerng geste.
business ~ NOV 18 te JAN 17 Faget customer journeys
sweetie oy capa need bot binesses
Reesencatse chou i
What erocvenservoes ei we afte: fo what
esses, 300 toca wich aes?
ve cost cee et ps sm
Phase 4) Develop otfer and operating model~
JAN to APR 2017
‘Custarer and channel value pespesttons
combine chau eaqtements ecto, sewers ee)
ex
saa arene die ot ee et seve nd entation ana itt assessment of preeced opereg, cotoong.
‘se chico, ae weit meds fo omange? ects ‘Passes
& Royal Mail Group
Market overview
‘The addressable letters and parcels market is ie gradual decline
“he overall eters and parcels market in slow cine
its Approximately -2% CAGR across the full UK ard export postal market.
Expo tonic seec 2% CAGR change acoss vrais an parcels fr he aatessablecombineé POL and IMG
><] Decline in both overait and addressable market is driven by reduction ia fetes
PAS, 5 overa coe sosice of decine is leter with a 4.6% CAGR defo «-substuton and techie innovation. Whe some
overaf growth is forecast m parcets(1-3% CAGR ), tis does not ofbeline impact ofthe letters decine
Growth forecast ia parcels ~ but in a competitive landscape
Online B2€ sales driving growth
‘ncrease in onine Retal ans Marketplace seting represents growth opporuny for parcets (3% CAGR’),sotums (¢-20%
CAGR") and Click ane Colest
ajo growth forecast in overall Cick and Collect (<32% CAGR foal overall) but this ie a smal segment of the market (c
‘44reby 2018) The addressable market (Le. out of store*PUDO cick and collect rate of growth is sioner at 18% CAGR
(2016-2026) wote ths is stong, itis currently only £% of te total e-retal delivery market, and wil se Sess than 2%
2024
ver capacity inthe markt riving incensed competion
POL: RMG nas a iarge markel share in Large Leties and Small Parcet cafegories (e ¢.c. 70% volume of Markefpace
Sellers for these producs), but MyHecmes isthe sirongest in Madiurn end Large Parcels hese products represent 56% of
Mareeigtace Seer volume vs S% for POL FBAG)*
‘Over-eapacity causing compeiton on pricing and margin squeeze. Historically, RM and POL have moved sway from the
Medium ! Large Parcel sectr ave to inabifty to compete on price in these segments As compedtors seek to move ito the
Land SP segments, these areas wi also become increasingly chafenging
SRE HR tet es Coelooe oe
Sov Vanes Tae Vue
Shree Mec Selt Sept Vw oy Aug 9°6 POU RUG Ont Fenn Act,
Royal Mail Group
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Competitor overview
‘Competitor threat comes not from a single organisation but multiple layers of threat from different competing models
= Royal Mail and Post Office as combined businesses have a large market share in the parcel and delivery market for
consumer and sub-account level small business customers, This is a legacy from the monopaly position and competitors ste
ooking to erode this share ip ali segments.
+ Competitor landscape is evolving putnatily due to technology innovation enabling
+ More efficient processes — ans therefore better able to campete on price.
+ More rapid edeption to market changes — so can keep pace/ stay ahead to maintain competitive advantage.
+ Setter customer experience — wihich drives increased expectations from 4 more online focused customer base.
{Mais not core business but + Disitermedation fo contol
AMAZON yey clement so operating in _=fifeulomer experience
this atea wth sgnificant Targeting key praftabie Materia, evottonary
Challenger Droaderinfvence. Presence POL RIG segments 5] change f mandting ow
eben asec ant ciop ot pos. + Erosion of RG! POL band services
KAY aint to mandate customer via commostsaion of
E behaviout postage
= collects Hetwork nated, similar mode!» Compete in suse of AE
5 1oRMG/POL More agie and market o henry sick OS
Traditional — aman technciogicaly inovatve ‘rate segments ged. Sonticued oraduat erosion
E Betler customer knowiedze. > Further gracualerasion of
rmatket share
Iovate organisations —«*‘Focus an part ofthe valve Less pregctabie, Could ve
‘esting market iseeptors in diferent aceas
could have material impact
Sprain a torent Chanerpstovarmanet gw) Sousive mimpactee
Dusness madeliogisniotihe Segment es areas, Miso aie
Royal Mail Group
Customer overview
‘Our customer expectations are evolving and competition is seeking to deliver a better customer experience.
We need to improve understanding of our customers to better meet their needs and keep pace in a changing
market landscape.
‘Segmentation overview fecused on customers using Post Offices for.
* Purchase o srop-off
+ Primary consumers and sricra SMES
+ Small Professional Firm and SME supplementary purchases and drop- for businesses that don't get a collection,
General customer context
Customer expectations are increasing
Customers exposed ta improved online capalties across industies. Growth in postal industry is driven By online
shopping so this demographic is particularly used to managine activiies ‘on the move’ with increased expectations of
immediacy These expectations are being applied to both sending and receiving parcefs, and are reinforced by
‘compeflors raising the bar on custamer offer and experience e g. thiough improved tracking capa
POL! RMG brand is strong but this is @ legacy strength and heing eroded
+ Gustemers increasingly familar and satistied eth otter brandis, commoditsing pestal services — POURMG seen
as less relevant
+ Competitors improving their quaity of service,
y
‘We have very limited customer data compared to competitors
Compettor models by default capture more customer information enabling improved customer insights, POL/ REGS
has snsuficient eepabity m this space when data iteligence provides 4 competitive advantage.
Royal Mail Group
0 a8
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SWOT conclusions
POL! REG have a future in the mais market but our combined strengths are legacy ones and we are in a defensive
position iv a 9 market place.
4A key driver of change in the competitor landscape i in technology and online capabiities. POL’ RMG will seed te stay
‘elevant {at a minimum} in order to compete and maintain market share in a landscape of evoling consumer
pehaviours
Growth of market share ts unikely in our tradiboca market given the legacy monopoly position and we wil have fo work
hard and be more efficient te maintain our current share.
‘Grove in new markets is feasinte (e.g. Click and Coltect) — ut these markets are smat so expectations on impact on
‘vera revenues and mamgins need to be realistic,
Key competitor strengihs are noted as agiiy to respond io markel changes and lower cost base. For ow combined
businesses to maintain share in a price sensitive market where brand strength may become less relevant, we need fo
fook at how we can manage our cos base in ores to stay competitive on price and also fund any technical
enhancements
“Success andl falure is driven theough getting the customer experience right and keeping @ relevant for evolving
customer needs expectations are increasing given Amazon and MyHermes experiences, and broader
‘access to technologies across ether industnes and purchasing behaviours (use of smartphones, increased eniine
behaviours etc} Abikty fo keep pace with these changes is fundamental to ongoing success.
‘Sains af Sir key siengis snd Weaknesses ave ted fo Gar om Working. Staying together we Fave an ead to end
network with a strong brand presence and comprerensive product ofesing. There are, however, commercial fensions
and operaticnal complenily as 3 result of beisg twe cruanisations. This impacts our combined aniily o respone
effcienty to the competion, Improving this should De an area of focus.
Royal Mail Group
Appendix 2: Next best alternative outputs
The following slides form an executive summary of outputs from the next best alternative
project work to date.
Initial economic modelling of Post Office as a Mails provider in its own right
saline Scenario : NBA Scenario
‘The Baseline . I forthe ha strategy were to Be launched fllesting the flava in exctusvity provisions ia
ascumes a ery 2020, we would expect our FY20/21 financial orofle to be very diferent. We woud
‘ake contro ofthe custome aropesition and product range, book all revenue we receive,
end bear the cost of delivery through contracts with Logistes Service PravicrIs! [LSPs
(Gur projections have bees Geveloped through a boctom-up exercize, drawing on Inout
‘rom logistics and reguiatory experts. They reflect conservative estimates of the
anticipates cost base st tas arly stage. Further deralles work i required to evaluate ovr
assumptions, and ta eabish a ‘best and "worst ase from detales sensitivity anaiwes
continuation of the
current relationship
vit
Potincome:
£5,193
RE contine to take
sales, neve presicted
r
]
i
1
'
'
i
1
\
i
1
wbecetsenot I ‘Our core assumptions are as fostows:
wehien anetrevenve I fie Jeo ae
serum I cei FevenceI We expec ft ret camer rf may anneal op na] P: Hah
conmmeceecotnete I ST [oozes secs chewets We terete expec tates ICON ako Acca veI volume
‘oeration cst and I Raval Most net pokes I wettice competion uae me scop vourne.Ourteteortrecsana. [Low's
eit 1 feven from Former behavow welep tan spear volanas hee, east [Mesrs
totum sole srr pce tne
Nowe mths I cecepted ri pedicel Sa Tea. ae
counterfactatwe I ehrough our nal ccine woes Coane [aay walar Saa ae flaw
sare POLives I bananas alacin Tne are ohare cao fo Pe
‘c£50m income trorm bs arvant martat asad productieve exit from Uk hs, we expecta adhere I Wesium™
srewced medtee I poy, Sever tes deta curiewerenatons ete se
edconracrvaie I" 3sam eee ee er
re the averall agent's pay pot for a period of 2-2 years m the Basetine:
foviongewsy H Ssvacteaupper te "hi ti be frst bara our apes
(ur DPC is therefore H peal conga efor ret eo) r
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ON
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REPORT TO POST OFFICE LIMITED BOARD
Hi 2016/17 Report to the Shareholder
Presented by: Nick Kennett, CEO POMS
Executive Summary
Context
Post Office Management Services Limited (“POMS”) is a subsidiary of Post Office Limited
(“POL”); it undertakes insurance intermediation and is regulated by the Financial
Conduct Authority. Under its Articles of Association, POMS submits a performance report
every half year to its shareholder. This paper is the report for the first half of 2016/17.
Questions this paper addresses
e What are POMS’ strategic objectives, shorter term goals and Plan?
e Is POMS delivering what it said it would do?
e What are the key constraints in delivering the short and long term plans?
Conclusion
POMS is on track to deliver its long term ambitions and strategies, confirming the
benefits and opportunities of operating as a standalone, regulated business within POL;
there are, however, a number of risks and dependencies:
Financials:
e While EBITDA was £(1.0)m to Plan at £4.9m, mainly due to weak branch travel
insurance sales (income £3.3m behind Plan), margin management and cost
reduction should result in a full year EBITDA of £7.9m (£(1.2)m adverse).
e¢ POMS’ regulatory capital is above that required by the FCA.
e POMS is, however, concerned that changes to POL's branch sales model, in particular
the removal of Financial Specialists, will impact life assurance sales/income from Q4.
Building the future model:
e In May 2016 the POMS Board approved a five year growth plan aligned to POL FS’
New Normal; it is targeting an EBITDA of £17m in 2020/21 and a contribution to
Group profit of £43m. This is on track against the original POMS business case.
e The achievement of the strategy is depends on POL’s delivery of services, including
marketing, digital delivery and data analytics. These are not governed by SLAs or
service contracts; discussions are underway to establish accountabilities, incentives
and delivery requirements.
e¢ The “Hawk” business acquired in 2015 is outperforming the business case.
e The new strategic technology platform (Zeus) is on track for delivery; this is pivotal
for POMS to integrate other general insurances and expand in the value chain.
Governance and compliance:
e Risk and governance structures are in place and being embedded.
e The most significant risk issue remains the operational oversight by POL of its
branches, as discussed at the Post Office ARC in September 2016.
Strictly Confidential POMS Hi 2016/47 report November 2016
7. Update on Proj
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Input Sought
The Board is requested to note the report.
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vice Board-24/1 1/16
POST OFFICE MANAGEMENT SERVICES LIMITED
REPORT TO POST OFFICE LIMITED BOARD
The Report
1. Financial delivery in the first half and outlook for the Full Year
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YTD YTD Forecast FY Var
Em Actual Var to Plan Plan to Plan
Net Income 20.4 (3.9) 39.4 42.4 (3.0)
People Cost (1.4) 0.6 (3.4) (4.1) 07
Marketing Costs (1.9) (0.5) (3.0) (2.6) (0.4)
Non Staff Costs (5.8) 15 (12.5) (13.2) 07
1B Costs (6.4) 12 (12.6) (13.3) 07
Total Expenditure "(155)" 2.9 " (34.5) " (33.3) 18
EBITDA 49 (1.0) 7.9 9.1 (2.2)
(Other @.4) Ot (0.5) (0.8) 03
EBT 48 (1.0) 74 8.3 (0.9)
[Capex (=) 07 Gi) 5) (0.2)
* “IB costs” are Inter-business amounts paid to POL for commissions and services
1.1. Half year to September 2016
POMS trading profit (“EBITDA”) YTD was £4.9m, £(1.0)m adverse to Plan.
Income was £(3.9)m lower than Plan, principally due to weak Travel insurance
sales in branch £(3.3)m:
¢ The Travel insurance performance was a result of lower sales volumes in
branches in Q1. This was reversed in Q2 by the introduction of a promotional
discount aligned to the purchase of travel money. While volumes recovered,
this impacted on margins, which were c20% below Plan.
* POMS partially mitigated the trading impact through various cost initiatives.
e Since the promotion ended in mid-September, travel insurance volumes have
remained at c115% of Plan; average commission per policy has recovered to
95% of Plan.
Staff costs are £0.6m lower than Plan due to release of bonus provision for
2015/16 and vacancies not being filled.
Marketing costs are £(0.5)m higher than Plan due to higher Travel spend
associated with the promotional activity, while non-staff costs (excluding
Marketing) are £1.5m lower than Plan mainly due to contact centre being £0.8m
lower than Plan.
Commissions payable to POL (Inter-business costs) are £1.2m lower due to lower
travel insurance sales.
1.2. Outlook for the rest of the year:
The forecast projects a shortfall in EBITDA of £(1.2)m versus Plan, implying a
£(0.2)m shortfall in H2. The main factors contributing to this are Travel insurance
income which is forecast to be £(0.1)m lower than Plan in H2, and a stretch target
in the Plan for Motor and Home insurance.
There are a number of risks and opportunities to the forecast and we continue to
work to reduce the gap versus Plan.
A potentially significant risk is the impact of potential changes to the branch sales
model. Further details are set out below in 2.4.
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1.3. Regulatory capital
POMS is regulated by the FCA and is required to maintain at least a minimum
£0.7m of qualifying capital at all times. As at September 2016. POMS’s qualifying
regulatory capital is £6.5m more than the minimum required by the FCA.
The year-end forecast is for qualifying regulatory capital to be £5.7m higher than
the minimum required. This figure includes an estimated £2.1m post-tax profit
tax to be earned in the second half of the year.
A current balance sheet is set out at Appendix 1.
1.4. Cash
POMS had £17.2m in cash at bank at the end of the half year. This is balanced
by £5.9m due to POL for commissions, £1.7m due to insurance third parties,
£5.5m of reserves and £4.1m for working capital.
2. Building the future model
2.1. POMS’ strategic objectives
© To deliver operational efficiency, product and pricing flexibility resulting in
greater control of, and access to, the value chain.
*® To establish direct control of customer management, policy conditions and
retail pricing.
¢ To build directly or enter into agreements with Underwriters, TPAs and other
suppliers to procure and develop the capabilities required to support the
chosen business model.
* To build a profitable asset for the Post Office whilst optimising returns.
2.2. The 5 year Growth Plan
The 5 year Growth Plan was approved by the POMS Board in May 2016. It is
founded on new business and operating models, and is aligned to the POL FS
“New Normal”. This will provide the environment to enable POMS to provide its
customers with enhanced service, control, trust and value by:
« Securing end-to-end responsibility for delivery, balancing internal and
external resources, and increasing access to the value chain;
« Ensuring POMS meets the needs of more customers, by evolving and adapting
its products and increasing customer awareness.
The delivery of the plan will increase POMS’ EBITDA to £17m in 2020/21, making
a contribution to POL Group’s profits in that year of £43m.
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2.3. Significant progress has been made towards these objectives in H1
POMS has successfully integrated the general insurance business acquired from
Bank of Ireland in 2015 and this is outperforming the business case.
Internal risk and compliance capability and processes have been developed.
The development of the strategic technology platform is on-track for delivery in
December 2016, enabling further expansion of POMS’ participation in the general
insurance value chain.
The retendering for the provider of POMS’ protection business has been
undertaken and contracts are targeted for signing by January.
2.4. There are challenges ahead
While the financial performance is broadly in line with the trajectory set out in
the 5 Year Growth Plan, there are significant delivery challenges/risks, including:
Market and Sales
« Managing the impact of political and economic change, particularly:
o The impact on travel, and hence travel insurance demand, of Brexit;
o The decline in Sterling;
o The impact from further interest rate falls on protection products.
e Ensuring that Post Office is able to deliver anticipated sales and service levels
as it manages its strategic priorities. At present the majority of life assurance
sales are concluded in face-to-face conversations by Financial Specialists. POL
is considering eliminating this team and concurrently building a sales team in
agency branches (“CRMs”). While this will reduce POL’s operating costs, the
CRMs will not be qualified to complete life sales, referring the opportunity to
contact centres. This risks both reducing POMS’ income and increasing call
centre costs; the potential impact has not yet been included in POMS’ year
end forecast or 2017/18 plans while full details are assessed.
AR and Other Risk Management
e Managing the impact of regulatory change, particularly relating to conduct risk
and the implementation of the Senior Manager’s Regime in insurance in 2018;
e Ensuring that Post Office is able to deliver the level of branch oversight and
management required under its AR obligations.
Services from POL
e POMS does not have its own Marketing, Digital Delivery or Data Analytics
capabilities, but instead relies POL to provide these. However, the
arrangements are currently not governed by SLAs or service contracts. The
POMS and POL teams are working together to put appropriate capacity and
governance in place, but there is a near term risk around capacity in POL.
POMS’ resources
e Having the necessary staff resources, technology and operational and risk
management processes in place to acquire and integrate the Junction GI
business in 2018/19.
POMS Management and the Board monitor these risks and seek to implement
strategies and investments to manage them.
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2.5. Performance of the “Hawk” business acquired from Bank of Ireland
In November 2015, POMS acquired Bank of Ireland’s interests in the general
insurance business that it had with POL (Project Hawk).
Since acquisition, the business has performed ahead of the business cas:
Benefits £m 2015/16 2016/17 Total
Actual/Forecast 1.6 44 6.0
Business case 0.3 3.8 4.1
Surplus/(Deficit) 1.3 0.6 1.9
The business case also incorporated further benefits in the years past 2016/17.
A review of those further benefits showed:
e The initiative to take on more of the value chain through buying-out main
general insurance supplier (“Junction”) now has lower gross benefits, but a
greater certainty of delivery. The net impact of these factors on the value case
was a drop in NPV of c£(10)m.
e Slower growth in existing business and slower growth in new products versus
the business case, but with an increased certainty of delivery for both. These
resulted in a £4m improvement in NPV.
Overall, the review showed incremental NPV of £25m versus the original £29m.
This reduction in incremental NPV is a result of the very conservative approach
the review took to valuing the benefits, particularly those from new and existing
products. If, for example, the valuation had recognised 50% of those benefits
then the incremental NPV would be £35m. Noting this, POMS is happy that the
acquisition is on track to deliver at least the business case benefits.
2.6. Project costs
The key projects in 2016/17 are:
« The new strategic technology platform (Zeus) is on track for delivery; this is
pivotal for POMS to integrate other general insurances (including the
integration of the general insurance business from Junction in 2018) and
expand in the value chain.
e Putting the new life assurance relationship in place (Project Hera) - on track
for delivery in early 2017
e Delivering the new MI system (Project Sequel) - delivered.
Costs are forecast to be on Plan, other than Project Zeus which is expected to be
£0.3m over Plan at £4.2m. This additional expenditure will be recovered in later
years.
2.7. Governance
Board, ARC and executive committees are in place and fully operational, in
accordance with structures set out in our authorisation submission.
An in-depth Board effectiveness review is underway and will report in January;
the results will be included in the full year report.
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3. Risk management
Risk management framework and governance structures are in place and are
being embedded.
The relationship with POL as both AR and service provider is in place; the most
significant issue, however, remains the operational oversight of branches, as
discussed at the Post Office ARC in September 2016.
Significant progress has been made to improve the systems and controls. Actions
are being developed by POL and POMS to improve the levels of conduct risk.
At its meeting in January, the POMS Board will assess the progress made, or
anticipated, and will assess whether it is comfortable to allow POL to continue to
sell POMS’ products in agency branches.
There have been no notifiable issues to the FCA in the period.
4. Conclusion
POMS is now well established and performing broadly in line the expectations.
The key building blocks are being built or are in place and being embedded. The
five year plan forecasts income and profit that exceed the original business case,
confirming the significant opportunity that POMS provides to its shareholder.
However there are a number of risks and constraints that may restrict POMS’
ability to deliver its Plan. The POMS Board and management are actively
monitoring these risks.
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Appendix 1: POMS Balance Sheet
£k Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16
Non-current assets
Intangible assets 46,008 45,994 46,979 47,089 48,571 48,369
46,008 45,994 46,979 47,089 48,571 48,369
Current assets
Amounts owed by group undertakings 225 386 381 525 0 0
Other debtors 197 73 126 189 150 293
Accrued income 5,386 5,350 4,830 3,845 4,571 4,250
Prepayments 32 27 23 18 155 130
Cash at bank and in hand 15,999 11,497 13,483 17,815 __17,928 _17,170
21,839 17,333 18,844 22,392 22,804 21,843
Total assets 67,847 63,328 65,823 69,482 71,376 70,212
Creditors: amounts due within one year
I Trade creditors (550) (473) (663)_-— (718) = (1,101) (1,203)
Amounts owed to group undertakings (7,888) (2,345) (3,231) (4,529) (4,900) (5,853)
Other creditors (1,374) (4,515) (1,859) (2,749) (2,442) (1,880)
Accruals (4,296) (4,305) (5,054) (5,234) (5,912) (3,537)
Provisions (1,033) (1,063) (1,121) (1,125) (1,131) (1,182)
Tax Creditor (195)__ (379) __ (432) __(678) __(831)__(965)
(45,335) (40,079) (42,361) (15,034) (16,317) (14,619)
Total assets less current liabilities 52,512 53,248 53,462 54,447_55,059 55,593
Creditors: amounts due in more than one year
Amounts owed to group undertakings (500) (500) (500) ++ (500) (500) ~—(500)
(500) (500) (500) (500) (500) (500)
Net assets 52,012 52,748 52,962 53,947 54,559 55,093
Capital and reserves
Share capital 50,000 50,000 50,000 50,000 50,000 50,000
Retained earnings 2,012 2,748 2,962 3,947 4,559 5,093
Total equity 52,012 52,748 52,962 53,947 54,559 55,093
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BOARD DECISION PAPER
Back Office Transformation
Authors: Rob Houghton/Angela Van Den Bogerd — Sponsor: Alisdair Cameron Meeting date: 24 November 2016
Executive Summary
Context
In 2015, the Board approved a “Transition” project to reduce operational risk and
stabilise Back Office hardware. An update was provided in September, which reminded
the Board that, in line with the IT Strategy, a further stage of development
(Transformation) would be required. The purpose of this paper is to agree the proposal
for that Transformation. The Board has not previously approved funding for this element
of Transformation, although the Three Year Plan has included a place-holder of £11m.
Today our Back Office systems enable POL to run the Supply Chain operation, settle
with clients, pay agents and employees and report financially and operationally. If these
systems fail, we cannot trade. Some £60b of transactions are processed over a year,
affecting all locations and over 50k people.
The September Board paper highlighted that, “We cannot continue to exist in the
transitioned state...” IT cannot commit to appropriate service levels across these key
business processes and we have now received a written confirmation from SAP that its
support for HR SAP and POLSAP will cease permanently in December 2017. This is not
a theoretical risk: that support was used in February to resolve a three day POLSAP
outage, which had Supply Chain working manually while we were unable to report the
Bank of England’s cash position and teams spent weeks re-inputting and reconciling. It
is not been uncommon for the settlements team to pay clients based on estimated
values, adjusting to actuals later.
The legacy complexity of these systems and the processes that work around them
requires manual working, spreadsheets and multiple interfaces. It is hard to maintain
strong control, as evidenced in the financial controls work, and limits our ability to report
and analyse our results. The resultant complexity has led to a prohibitive cost of change,
preventing improvements that should occur in business as usual, and higher run costs.
Questions addressed in this report
1. Which transformation options have been considered?
2. What is our recommended approach?
3. What are the key risks to a successful delivery?
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Conclusions
The back office application estate cannot stay as is. The minimum spend is £8-12m to
upgrade and stabilise the systems, without delivering any improvements in the cost of
change, IT run costs, control or future flexibility.
We have assessed three other options: removing the older systems; incrementally
improving the way we work; and replacing everything with a completely new ERP
system.
We are recommending Option 3 as representing the right balance of financial benefit,
operational control, flexibility and risk. The cost increases to £16-20m to gain £3.5m
lower operating costs and enabling a further £3m to be realised across other programs,
with improvements in controls and ways of working.
The risks are significant, although substantially less than for a full ERP replacement. We
know from experience that any change to Back Office will be a journey of discovery. We
have a 17% contingency in the plans, which had already been adjusted by 7% following
Wipro’s independent review.
More importantly, we have developed the project in stages. We can progress Option 3
while retaining Option 2 as a viable alternative until we have proven the full concept.
The next significant decision date is April 2017. The only spending commitment at this
stage, approved by the Group Executive, is for £1.54m on top of the £0.2m spent to
date.
Input Sought
The Board is asked to:
- Support the preferred Option 3, budgeting for costs of £20m
- Note the approved spend to April 2017
- Require an update and any future funding requests in March-April 2017.
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The Report
Which transformation options have been considered?
4. Four approaches are summarised below.
IT Dept. eeiee ie Business Project
opt cost I opex I irpisk I opex I NPV I Payback an jor I audit & I Efficiency Risk &
tion (em) I Benefit I (inc.0R) I Benefit I (Em) Yrs other Controls I /Fitto Delivery
(em) (em) alia Strategy Complexity
1. The “No. Medi
Transformation I 8-11 oa v ° 8.63 26.46 0 x x eclum
/High
Scenario”
2. Remove Old 13-16 3.0 v oO 9.0 46 2.1m x x Medium
Systems /Migh
3. Transform 16-20 3.0 v 04 -1L9 5.74 3.1m v Vv High
4. Transform to 24-30 3.0 v 04 24.2 8.62 3.1m v v Very High
new ERP
5. The first option enables no movement in improving control or flexibility and derives
no benefits. The fourth option is substantially more expensive and riskier with no
guaranteed additional benefit. Neither are therefore recommended.
6. Options 2 and 3 represent more nuanced choices. In both cases, we would remove
POLSAP, HR SAP and our old warehousing systems. Option 3 additionally adopts
industry standard processes, changes ways of working and will give us the flexibility
to support future change quickly and cheaply.
What is our recommended approach?
7. We are recommending option 3 Transform, with a number of checkpoints enabling
a fall back to option 2 - “Remove Old Systems” should costs/risks escalate. Option
3 is in line with the IT Strategy:
> Simplify, Standardise, Reduce Cost: adopt industry norms; configure
systems not customise. This makes it easier and cheaper to outsource should
we choose to.
> Build in Traceability: Transact sales in ERP allowing onward transactions and
reporting to flow from a single view of sales. This will give us one version of the
truth; sales data that is accurate and reliably so. Improves auditability, reduces
report creation and validation time, changes employee focus to analysis and
action.
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>» Create Capability: Invest internally, ensure end-to-end process knowledge and
technical skills are in-house and enables cheaper change delivered without third
parties.
> Deliver Small, Deliver Regularly: Break down large goals into achievable
pieces of work, build momentum, hit targets.
8. Key building blocks include:
>» Designing out POLSAP and HR SAP migrating processes to other existing systems
simplifying the IT landscape
» Processing sales transactions in ERP, enabling settlements, invoicing, agent
remuneration, profitability analysis and sales reporting to occur using standard
SAP functionality - with auditable linkage.
>» Replacing 3 old warehouse management systems with a single modern solution
enabling process savings and online ordering for all branches.
> Improving retail cash management, linking directly into our core finance system
and enabling online ordering for Post Masters
9. The diagram below summarises the planned delivery scope for this program.
PROCESSES CHANGE & PEOPLE TECHNICAL
® jou from admin: &
repart creation to data set Hierarchies
# Agents Remuneration and analysis % Agent master anid
> Agent Debt > Client engagement and channel hierarchy
» Cash Processing and standardised & Agent Contracts
Treasury invoicing & Sales Organisation
F Procurement interaction ® Sales transactional flows
> CostAccounting n of staff and rc
nt Contracts
> Product & Channel overtime Chart ot Accounts, Cost& ig ranality to
Profitability Analysis Profit Centers Transtrack
® Warehousing ® Remove or adapt 56.
interfaces
10.Future flexibility: Using more of our ERP’s features requires embedding core
p
bi
>
rocesses in system steps. This can lead to reduced flexibility and the impact on our
usiness has been considered. The following are core to the system:
Organisation Structure — Post Office’s divisions and channels will be created
as core structure. These are simple to add to, remove or group, but difficult to
split or completely redesign. Upfront design needs to gauge the level at which
these are created carefully.
Financial Principles - One challenge currently is that the financial principles
(e.g. what is our definition of a profit centre?) are not consistent. Once these are
established, they are difficult to change.
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> Detail - The detailed list of profit centres (or other elements) can be added to
and modified simply. Multiple product hierarchies can be created and channel
reporting can be available by a number of selection criteria.
11.The highest impact process being tackled is client settlements. KPMG recently
conducted a detailed review of our 440 client contracts detailing our approach to
reconciling and validating each back into our accounts. The settlements team has
been involved setting the high-level direction for our approach and will be
instrumental throughout implementation. Approach to key areas are:
>» Client Contact: Clients rely on access to Horizon data for detailed transactional
information, this access will remain. The settlements team daily provide one of
five template word documents with summarised volume and value. These are
emailed (or faxed) to clients alongside the bank transfers. This part of the
process will simply be replicated and improved as the process moves to our CFS
system.
>» Settlement Data: Almost 80% of the 440 clients settle based on Post Office
data, hence will successfully migrate into our proposed standard process. Some
of larger clients, by value, require upfront payment (e.g. predicted Santander
account transactions) or using their data (e.g. Camelot); in these cases, our
approach will be to engage and move them to our new process with manageable
exceptions. These are the expected areas of concern as there are some case
where a win-win improved process won't be found and we will have to determine
mitigation plans.
> Fall Back Plan: In all cases it is possible to migrate the current settlement
process as-is. The current process involves creating payments that are not
system-linked to sales then reconciling manually to demonstrate that accounts
are balancing. In the case that we cannot move to a more automated process
for some contracts, they can continue to run on a similar approach in CFS as
they do today in POLSAP.
12.The program will be governed by the Post Offices’ “One Best Way” methodology
and in line with the IT strategy focus on incremental delivery, retaining control,
avoiding large spend commitments and building skills into the retained team.
13.The delivery plan shown below provides an initial view on the projects required and
their timelines.
> Transformation Base State — up front technical prerequisites, basic master
data and design principles
> Sales Transaction Related - the transformational changes dependant on
first processing sales transactions: settlements, invoicing, agent
remuneration, profitability analysis and reporting. Planned to be delivered
incrementally over time by business unit / product group / type of sales
process e.g. we may first tackle sales of Mortgages, then bill payments etc
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» Other Projects — projects required to deliver the overall transformation aims
and cost reduction but able to run with minimal dependency on the overall
program including: moving financial processes from POLSAP to CFS (e.g.
agents’ debt), moving cash processing functionality from POLSAP to
Transtrack, refreshing our warehouse systems.
2017 : 2018
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar
14.The initial budget drawdown request for 2016/17 is £1.532m (£217k has already
been authorised). Further funds will be requested when the deliverables below for a
project complete and submission is made to move to the next phase.
15.In April 2017 the program will report back on the extent to which we intend to
transform, seeking approval for further funding. Outputs will include the results of a
study into our client agreements and the extent to which we can standardise the
back end processing. And the results of a pilot modelling a truly transformed back
office using SAP to process sales transactions generating settlements, invoices,
Agents’ pay and product profitability. At this checkpoint we will decide whether to
proceed with option 3, or revert to option 2.
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16.Program costs have been modelled with resource and material plans created for each
area of work. In order to validate expected costs Wipro were engaged to provide an
independent view and indicated that the program may cost 5-8% more than our
pre-contingency view: we provided for 25% in the £20m recommended budget.
Cost
Phase (m)
Transformation Base State 25-3
Agents Remuneration 1.5-2.5
Sales Processing 2-2.5
Financial Operations and Procurement 2-25
and Reporting Improvements °
Settlements Re-design 15-2
Supply Chain Cash Systems 3.5-4
Warehouse Refresh 3-3.5
17.Benefits are as set out below:
Benefit Generator Amount Calculation
POLSAP Infra, Support. Licence = +£1,890,163
Remove POLSAP £1,167,686 I Increased CFS Infra, Support & Licence = -£475,334
Increased Transtrack Support & Licence = -£247,143
Removal of CSC common services (printing, authorisations, portal)
£1,130,000 I required to manage multiple SAP environments. With only CFS left
these are not required, and there is no additional OPEX to replace.
Remove SAP Common
Services
SAP extended maintenance charge = +£224,529
SAP extended .
£359,067 I SAP Active Embedded support = +£269,076 (Partial reduction of
Maintenance Charges
£134,538)
Transtrack moves off I oo, a4, I Remove Citrix licence costs = +£75k
Citrix , Microsoft alternative included in current licencing.
Mercia Licence = +£55,000
£310,331 I WCS Licence = +£128,375
Galaxy = +£466,956
Warehouse licence and
support reduction
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Benefit Generator Amount Calculation
New WMS system = -£300,000
Front end App = £-40,000
Non staff costs (£30k paper / £20k postage) = +£50k
Fixed staff costs.» (2. x_~=— PO), = —+HES8.5K
£443,500 I Variable staff costs (2 x $O1 equivalent) = +£45k
Remove Capricorn engineers = +170k
Increase pick efficiency = +120k
Improved — Warehouse
processing
Total I £3,485,584
18.In addition to the benefits above directly attributable to the Back Office
Transformation business case, there is a further £3,089,586 of claimed benefits in
other programs dependent on option 3 being delivered:
>» Online Cash Ordering replaces call centre = £400k headcount reduction
» Decommissioning HR SAP = £2,056,586 licence, infrastructure and support
cost reduction
» FSC process simplification = £633,000 headcount reductions
19.The program will be delivered using the contracted Back Office partner (Accenture).
We will also spend on backfilling Post Office resources and supplementing them with
skilled contractors.
20.The diagram below shows the proposed program organisation grouped by process
and capability. An early deliverable (in progress) is a resource plan highlighting
capability gaps for discussion on where we should hire, contract or buy-in skills.
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8.
POST OFFICE Page 9 of 11
LS
e Vendor
Management
Transformation Director
Client Engagement Sales& Product Agent Cash Stock
Client communications Finance Billing Mgmt Pay Mgmt Mgmt
21.Wipro recently conducted a review of the detailed approach, resource plans and
budget for the program. Their report concludes:
» The approach for the program, desire to simplify through consolidating into
systems already in our landscape and use standard processes is a good one.
» Internal change management should not be underestimated and requires focus
throughout
» The timelines provided were suitable for the program of this size and
complexity, however Wipro believed they could be accelerated (something we
believe would not be possible within the Post Office for our tasks). However
they recommended some additional technical steps and overall believed costs
may increase by 5-7%, which has been taken into account in our figures.
22.The Post Office has faced significant challenges in recent programs and is
implementing a number of the lessons learned from these in this approach.
Lesson Learned
Costs have been budgeted using current program
Incumbent vendor costs should actuals as a guide.
not be underestimated. Key vendors (inc. Fujitsu, Accenture) have been
involved in the approach and budgeting.
Fixed Price Contracts are not
suitable for large scale change
where Post Office is accountable
for external deliveries
The team will be led by Post Office resources backfilled,
with specific capabilities brought in to support. The
majority of delivery will be time and materials against a
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Lesson
Large delivery projects are prone
to failure and lack of oversight
Learned
delivery plan. Fixed price will be used only for items
work entirely within a single vendor's control.
Whilst to achieve the overall aims, a number of projects
are required, these are being broken down into their
smallest component parts, with an approach of
incremental delivery.
What are the key risks to a successful delivery?
39.The tables below contain a brief description of the key risks identified and our plans
to overcome them.
Title Description
The Post Office currently settles
and invoices clients in a multitude
of fashions, providing bespoke
information in many cases. There
Mitigation
Communicate early, take feedback and consult
with client senior stakeholders, to ensure that
the operation teams are instructed to work with
Owner
Angela Van
Den
gives a risk that Post Office will be
running the same financials in
POLSAP and CFS, increasing the
potential of double reporting
revenue, or mis-settling.
is a risk that as we try to
Client impact ; we ty us where possible. Bogerd/Martin
standardise we come into conflict ; ne wi
. Re-negotiate contracts/ways of working with I George/Nick
with client contract, either i
\ ‘ key customers (condition that we need toI — Kennett
jeopardising our relationships or custo ,
' provide clients a decent or better experience).
reducing the effectiveness of the
program.
It is essential to bring core sales
into CFS, this can either be
completed as a big bang (meaning ;
The Finance team will need to outline a plan for
all contracts and settlements . °
dealing with this challenge early in the project.
move together) or incrementally, I 9°311"8 Wit
‘foge' ° During project the financial reporting team will
Concurrent Our view is that an incremental .
; need to demonstrate each month that errors I Financial
Financial approach is overall lower risk for
Y are not occurring. Controller
Systems our organisation. However, this
To ensure the approach is solid there is a plan to
engage our auditors early to agree the
approach.
There
Master
groupings (eg. for Horizon, for
Stock, for Agents Remuneration,
for reporting) and questions
are
data
multiple Product
definitions and
Product Data
An entire work stream for the program will be
dedicated to Product and Branch master data,
offshore support for data cleansing and
manipulation is budgeted.
James D’Souza
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Title
Description
about the master data quality.
Work will be required in order to
create a clean Product Hierarchy.
There is a risk that this will be
more challenging and expensive
than planned.
Mitigation
Should the team be unable to tie together all the
product threads in the organisation a fall back is
to revert to receiving values/products/volumes
into SAP from sales systems, with reduced
controls and checks, leaving multiple product
definitions and hierarchies in our organisation.
Product master governance will be updated
alongside the project to ensure on-going
adherence to the updated approach.
Owner
Cost/Time
There is a risk that the budget and
timeline are not accurate.
As outlined in the transformational principles
section the program is delivering where possible
in incremental chunks, hence timeline and cost
slippage will be visible early enabling corrective
action to be taken.
Wipro reviewed our detailed cost estimate and
resource plan of £16m. During the sessions
(workshops with Accenture, SAP, our back office
departments and technology teams) it became
clear that additional technical steps would be
required. Overall Wipro’s view including upsides
and downsides was that our total costs would be
5-8% higher, this is included within our
requested 25% contingency.
Ben Cooke
Resource
capability and
Business
Focus
The Post Office is undergoing
significant change with a high
number of projects going on e.g.
FS Digital Transformation, EUC
Admin etc. There is a risk that the
required for the
program are not available, or
focus is distracted.
resources
The Back Office team & applications are largely
distinct from front office and FS/POMs activity,
hence digital and Horizon related projects are
not considered to be a major threat (pre-
planning has occurred with Fujitsu for the
Horizon interface and resource will be available
Jan-Mar)
Joint planned the
departments heavily involved and the other
back office programs (SSTP for FSC and
Successfactors for HR).
In Supply Chain where key resources could
potentially have their roles changed through Iris
early discussions have occurred to earmark
critical resource & will be picked up once the
program is funded. Currently all essential team
has occurred with
members identified are remaining within the
Post Office.
Alisdair
Cameron
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BOARD DECISION PAPER
Broadband Customer Acquisition
Author: Alwen Lyons Sponsor: Alwen Lyons Meeting date: 24 November 2016
Executive Summary
Context
The Board were asked by email on 4 November 2016, to delegate authority to the
Chief Executive and Chief Financial Officer to proceed with negotiations and sign a
contract for the acquisition of 78,000 Broadband customers from New Call, who trade
under “Fuel Broadband”.
The Board approved this request by email response and the negotiations have started.
The Board’s delegation now requires formal ratification.
Input Sought
The Board is asked to ratify the decision by the Board to delegate authority to the Chief
Executive and Chief Financial Officer to proceed with negotiations and sign a contract for
the acquisition of 78,000 Broadband customers from New Call, who trade under “Fuel
Broadband”.
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BOARD
Post Office Limited Sealings
Author: Alwen Lyens Meeting date: 24 November 2016
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1454 to 1461 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1454 to 1461 inclusive in the seal register
is hereby confirmed.
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POST OFFICE LIMITED
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Date Register of Sealings Company Number
24.11.2016 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
1454 / Deed of 21/10/2016 19/10/2016 Deed of Surrender and Release relating to a lease of premises known as Jane MacLeod Jean Reynolds
Surrender 9 Higher Road, Urmston M31 1AA. Robert Graham Trustees Limited and
Post Office Limited.
1455 / TRI 31/10/2016 26/10/2016 I TR1- 35 The Broadway, London, NW7 3DA Jane MacLeod Jean Reynolds
1456 / Licence 31/10/2016 27/10/2016 License to Install Air Conditioning Equipment relating to Land at the Rear I Jane MacLeod Jean Reynolds
of 113 Baker Street London W1 I
4457 /Surrender 02/11/2016 28/10/2016 Deed of Surrender of Lease: Post Office, Market Place, Chesterfield S40 I Victoria Moss, Deputy Company Jean Reynolds
of Lease - TR1 1TL-TR1 Transfer of whole registered tite (Title no. of property Secretary
DY410908) Full tile guarantee. Transferor is POL and Transferee is
Trillium (RMF) Limited.
1458 / Lease 02/11/2016 01/11/2016 Lease Renewal of 72 High Street Hoddesdon, Hertfordshire, between Victoria Moss, Deputy Company Jean Reynolds
Renewal Nicola Trigg and Graeme Ross Atkinson as Executors for Elizabeth Secretary
Fowler (1) and Post Office Limited (2) for a further § years. (Underlease)
14597 10/11/2016 08/11/2016 I Reversionary Lease by reference to an existing lease relating to Ground I Victoria Moss, Deputy Company Jean Reynolds
Reversionary Floor and Basement, 354 and 356 Edgware Road, London W2 1BG Secretary
Lease between Simpsons Paints Limited (Landlord) and Post Office Limited
(Tenant),
1460 I Deed of 10/11/2016 08/11/2016 Deed of Variation relating to Ground Floor and Basement, 354 and 356 I Victoria Moss, Deputy Company Jean Reynolds
Variation Edgware Road, London W2 1BG between Simpsons Paints Limited Secretary
I (Landlord) and Post Office Limited (Tenant). I
1461 / Renewal 14/11/2016 11/11/2016 Renewal lease by reference to an existing lease between Makan ‘Alwen Lyons Jean Reynolds
lease
Investments Limited (a company registered in Jersey 76832) (Landlord)
and Post Office Limited (Tenant) in respect of basement and ground floor
premises at 124 Deansgate, Bolton (as per the existing lease dated 9 May
2006). Term: 5 years with effect from 9 May 2016. Rental: £40,000 per
annum exclusive of rates and VAT to be paid quarterly in advance
Register of Sealings
Alwen Lyons
Page 2
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POST OFFICE BOARD
Performance Review —- Health
and Safety
Author: Martin Hoperoft Sponsor: Martin Kirke Meeting date: 24" November 2016
Executive Summary
Context
1.1 Keeping our employees healthy and safe is fundamental to Post Office success.
This is reflected in the Post Office Board’s legal responsibilities - directors can be
personally liable when health & safety duties are breached and members of the
board have both collective and individual responsibility for health and safety.
1.2 Our Health & Safety performance has improved significantly in the past 5 years
and we have a rolling 3-year plan to drive health and safety compliance and risk
reduction. The key risks of driving and robberies are the subject of mitigating
activities. Our reporting and safety management system is measured against the
externally recognised health and safety standard - OHSAS 18001. We recognise
the importance that wellbeing can play in creating engaged and motivated
employees and have developed and implemented an extensive wellbeing plan.
1.3 The aim for 2016/17 is to continue the year-on-year improvement by targeting a
reduction in four key safety metrics: accidents; lost time accidents; days lost; and
personal injury claims.
Questions this paper addresses
2.1 What is going well across health and safety and what is not going so well?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
2.3. Are there any significant emerging risks?
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Conclusion
1. Performance continues to remain strong against all four of the key health and
safety metrics, including absence accidents and lost days (see Appendix).
2. There is an appetite from the Group Executive and across the business as a whole
to improve awareness of health and safety performance, management
responsibilities and compliance. The Health & Safety Team and Property
Management Team are attending many meetings and workshops to support and
provide guidance and training.
3. Mitigating actions are working to reduce road risk and the risk of robberies. (see
Appendix)
4. Recent environmental training has highlighted that POL may not be following best
practice in the way we address environmental issues across the business and
that Post Office Environmental Strategy and Policy could be strengthened.
The Head of Health & Safety has set up a focus group, also involving Property
team, the Social, Action and Inclusion Manager, and legal team to address
ownership, governance and best practice. A report, with recommendations, will
be provided to the GE H&S Sub Committee and Risk and Compliance Committee.
5. Following a recent Property Compliance review, it has been highlighted that
additional training is required for ‘Person in Charge’ (PICs) in Directly Managed
branches to improve their competence and awareness. Managers are completing
basic online PIC training with additional training workshops being arranged
between Jan - Mar 2017 by the Head of H&S and Property Compliance Manager.
6. Following a ‘deep dive’ H&S session with the GE, it was agreed that the Director
of Employee Relations & Engagement and Head of H&S provide executive
awareness training to GE Members during Nov and Dec 2016.
Input Sought
We ask that the Board to note the current safety and wellbeing performance, risks
highlighted and mitigating activity.
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What has gone well across Health & Safety
e ‘Accident’ and ‘lost time’ incidents have reduced at P6 2016/17 when compared
to September 15/16 and are meeting the continuous improvement target of 5%
year on year reduction. (see appendix)
e Current road risk performance has also improved when compared to 2015/16
with ‘at fault’ incidents remaining 32% lower than 2015/16.
e Whilst the number of CViT violent incidents have increased compared to
2015/16, robberies have remained low in August and September (following the
slight increase in July). 2 out of 15 incidents have incurred injury.
«The risk profile of Supply Chain will change due to the current restructure and
changes in workload, delivery routes and relocation will potentially increase risk
through change management activity resulting in distraction. The Health & Safety
team are attending the weekly Iris programme and work stream meetings to
provide support, including risk assessments, training and support visits to sites.
e Accidents involving customers at Crown and hosted branches are investigated,
reviewed to identify any preventative measures and benchmarked. Current volume
remains very low with fewer claims from customers. Analysis is being undertaken
and will be shared at the December GE H&S Sub Committee meeting.
e The volume and value of personal injury claims has reduced with provision for
known unsettled claims also reducing to £602k at Period 7 (October).
e Mental health related conditions are the single most common cause of longer
term absence with 17% of occurrences and 31% of total absence days, a slight
increase at P6 2016/17. Analysis is being undertaken to understand which areas of
the business may benefit from additional ‘mental health awareness’ training. There
has also been an increase in the number of users of the online ‘Help’ Employee
Assistance and Lifestyle Online websites possibly in response to recent increases in
absence but also awareness of resources. (See Appendix)
e Attendance levels have reached 96.8% YTD at P6 (September 2016/17) and
remain on target. However, there has recently been an increase in the level of
absences in Crowns but a decrease in Supply Chain. (See appendix)
e Three Wellpoint™ health check kiosks have been utilised across all largely
populated sites (>25) during the first half of the year with very positive feedback.
Mobile health checks will be offered by the Health & Safety team to Crown branch
and Network Field team colleagues from November.
* Property - Health and safety related risk and facilities management have been
assessed as medium risk, reducing to low by year end. This follows a programme
of checks, inspections and closure of risk assessment actions in accordance with
Health and Safety at Work Act and is now virtually complete.
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Overall property risk has reduced from high to medium and expected to be low by
year end, mainly due to the recent focus on completion of technical risk assessments
by CBRE and completion of actions by the Crown Office and Supply Chain lead and
area management teams, supported by H&S and Property teams. Additional training
will be provided in workshops to Persons in Charge (PICs) from January 2017.
e Hosted Sites —- we have a duty of care to our employees working within ‘hosted’
premises eg. WH Smiths. A trial is under way to involve Trade Union H&S Reps in
site meetings prior to transfer date, to support the local managers / project
managers in respect of planning and advice. The Head of Health & Safety is in
contact with the WH Smiths H&S Manager to develop relationships, understanding
of the H&S processes and support available to local Post Office Managers.
What has not gone so well?
e¢ Property - The most significant area requiring improvement has been managing
fire risk, as reported by CBRE to the Property Compliance Board as a finding from
their risk assessments. High risk fire actions have been closed with medium and low
actions planned to be closed by November.
e Customer Harassment - Concern was raised by the Westminster local authority
regarding Post Office Policy for dealing with violence and abuse by customers,
especially in London where there is a growing problem with the homeless population
and their presence in our branches.
Positive recognition has been received from the Environmental Health Officer in
Westminster for the way Post Office has effectively managed this emerging risk in
the London Crown branches. Consideration is currently being given for sharing with
Postmasters and signposting them to the Health & Safety Executive for support and
guidance.
2,2 What are we doing to mitigate the key risks, including
driving and robberies?
e Road Risk: Driving activities have the potential for high impact/loss and
therefore remains one of the more significant residual risk which is successfully
being mitigated through a number of ongoing initiatives. Following a restructure
of the Fleet Management Team, Head of H&S and National Fleet Manager are
continuing to support the Road Risk Consultation Forum to ensure appropriate
plans and actions in place to mitigate emerging trends and risks eg. initiative to
capture signatures from all colleagues who drive for work that they have received
and understood the policy and instruction alongside licence checks.
e Robbery Risk: Robberies have the potential for high impact/loss and remain a
significant residual risk. We are successfully mitigating this through a number of
initiatives and best practice. Ongoing monitoring of the risk profile will inform
the assessment of the need, or otherwise, of body armour.
e Safety Risk: Concern raised with GE at the deep dive session that mobile
phones are being used by Business drivers, including joining conference calls.
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Policy and guidance issued via a communication in August, reiterated by Senior
Management during September. There needs to be strong leadership and
empowerment for employees to challenge anyone on a call who may be driving
and further discussion is planned for the GE Exec Coaching sessions in November.
e¢ Property Risk: Remedial work for all identified high risk items has been
completed and plans for addressing medium risk electrical, asbestos, building
fabric and legionella have been built and are being undertaken.
Health and Wellbeing: We recognise the benefits that wellness can bring to the
organisation and therefore there is an extensive programme of healthcare
interventions to all areas of the business.
e The Health & Safety team are working closely with the Communications team
to support a plan of activity to further raise awareness of the resources available
to colleagues, including comms, blogs, video and face to face workshops.
« A programme of wellbeing activity, including raising awareness of mental
health conditions, symptoms and the support available has been updated.
¢ The roll-out of a second programme of health checks to all employees via face-
to-face clinics and stand-alone digital wellbeing kiosks will continue from Nov.
e Work is currently being undertaken to evaluate the link between local
engagement scores with Wellbeing, analysing absence data and the
engagement index and wellbeing scores, with focus on mental health related
absence in particular. Conclusions and a proposed plan of action will be shared
with the GE H&S Sub Committee in December.
2.3 Are there any significant emerging risks?
e The Environmental Policy, plan and level of reporting is currently under review.
A Strategy Tactical Group has been set up by the Heads of H&S and Property, the
Compliance Manager and CSR Manager, supported by legal and FM provider
guidance to review strategy. The first group meeting took place on Nov 1%. POL
directors will be made aware of the significance of environmental reporting, how
it is affecting our brand image, the potential for personal liability with further
discussion at the GE H&S Sub Committee in December.
e A significant gap has been identified in the competence of managers to carry out
their Person in Charge (PiC) responsibilities and a revised on-line training product
has been developed and issued by the H&S Team, with a requirement that all PiCs
complete this by September. Follow up H&S training workshops will be provided to
PiCs and deputy PiCs, covering Premises H&S, Site Log Books, Fire Extinguishers.
(Appendix Attached - Performance Charts)
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APPENDIX - Summary of Safety Performance - YTD Period 6 (2016/17)
All Accidents ~ YTD Cumulative at Period 6
250
200 I A :
LC .
2 150 -
3 _ ame
= 100 a aoe
Se s le :
: a
50
ee
scenes Period (Apr - Mar)
P2 P3 P4 P5 P6 P7 PB PO P10 Pit PI2,
[2086 ar a 2016017 aN 2018/16 Absence 2016)17 Ansence
‘Accident’ and ‘lost time’ incidents have reduced 12% and 50% respectively at Period 6 YTD (September
2016) compared to 15/16
Grown Office Accidents YTD Pé
Supply Chain Accidents VFO P6
Netw Crow Ofer To Dae Prof of erent
ee ee ee es ee ee
Sup CaP ost
Days
100 ee
P7 PB Pe PIO PIT
PI P2 PS PA PZ
Period
[ais anew]
Current road risk performance has
‘Re fault’ incidents are also down by
31.58% P6 YTD (Sep).
Lost Time injury Frequency Rate
Supply Chain
YTD PS ~ 0.636
2015/26 out turn ~ 2,042
2026/17 target ~ 0.930
Post Office ~ Employes
YAO PS ~0.210
2015/16 out turn— 0.370
2016/17 target ~ 0.350
PO Benchmark ~ 0.480
Post Office CViT Robberies ~P6 (Sep16
Incidents ~2 (2 successful] vs 4 in 15/16 (1
successful)
Violence ¥FD ~ 16 vs 3 (15/16 YTD)
Injuries YTD ~4 vs 0 (15/36 YTD)
‘Weapons YTD ~ 6s 1 (15/16 YTD)
2CVIT incidents were in Birmingham
Post Office (All branch types} Robberies ~
6 (Sepi6)
Incidents - 9(5 successful] vs 7 (5
successful) in 2015/16
Violence YTD - Os 2 (2015/16)
Injuries YTD ~Ovs 2 (2015/26),
‘Weapons YED - 10 (5 firearm) vs 11 (3,
firearms} fast year. One incident in
September resulted in a £16k loss, where
the SPMR was forced to open the safe by
three suspects wielding machetes.
improved by 20.19% compared to 2015/16.
Strictly Confidential
Post Office Board-24/1 1/16
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APPENDIX - Summary of Wellbeing Performance - YTD Period 6 (2016/17)
Sick Absence %ge
2016 / 2017
Aprit I May I june I 3uly I Aug I sep Gross
Period I Period I Period I Period I Period I Period I Y.T.D I Hours
ot o2 03 04 05 o6 _I Totals _I Target
FINANCE 3.5% I 3.2% I 3.4% I 3.5% I 2.9% I 2.8% I 3.2% I 3.5%
FIN: SUPPORT SERVICES (ALL) 4.6% I 3.3% I 3.2% I 3.0% I 2.8% I 3.1% I 3.3% I 3.8%
FIN: SS FSC 3.9% I 2.6% I 2.4% I 2.8% I 3.4% I 1.6% I 2.7% I 3.4%
FIN: SS CONTACT CENTRES 8.4% I 4.5% I 4.2% I 3.6% I 2.2% I 3.6% I 4.3% I_6.7%
FIN: SS HRSC 2.4% I 3.4% I 3.8% I 3.1% I 3.9% I 4.8% I 3.5% I 2.6%
FIN: SUPPLY CHAIN 3.4% I 3.4% I 3.6% I 3.9% I 3.2% I 3.0% I 3.4% I_3.7%
SALES & NETWORK 3.3% I 3.0% I 3.1% I 3.6% I 4.0% I 4.2% I 3.5% I 3.2%
SN: CROWN SALES 3.7% I 3.4% I 3.3% I 4.0% I 4.4% I 4.6% I 3.9% I 3.5%
SN: SALES DIRECTOR 3.9% I__2.5% I 3.2% I 3.0% I 2.5% I 2.6% I 3.0% I 2.9%
PEOPLE & ENGAGEMENT 1.6% I 1.7% I 1.3% I 1.1% I 0.6% I 1.9% I 1.6% I 1.1%
PE: COMMUNICATIONS & CORP
AFFAIRS 0.0% I 3.4% I 3.1% I 3.1% I 0.2% I 0.0% I 2.0% I 0.3%
GENERAL COUNSEL 0.3% I 0.4% I 0.0% I 2.9% I 1.3% 0.6% I 0.8% I_1.8%
GC: SECURITY 0.2% I 0.1% I 0.0% I 2.4% I 2.5% I 1.2% I 1.1% I 1.9%
[ rtwancrat seavices Lice% I 2.1%] 22% I 21%] 1.6% I 1.6% I 1.7% I_2.0% I
[Post office ura [3.2% [2.0% I 3.0% I 3.4% I 3.4% I 3.5% I 3.2% I 3.3% I
Trends - Attendance levels have reached 96.8% YTD at P6 (September 2016/17)
and remains on target. However, there has been a recent increase in the level of
absence in Crowns but a decrease in Supply Chain which has helped the overall
business performance. (See chart above)
Network & Sales absence levels have increased over the last quarter and risen above
target (overall sick absence 3.5% v 3.2%). We have seen an increase in Crown Office
long term absences (2.2% LTS up to 3.3% in recent months). Analysis is being
undertaken with the Occupational health partner to understand underlying trend by
geographical areas.
Supply Chain absence reduction is mainly due to a reduction in long term absences
wither by a return to work or exit from the business. (2.2% LTS down to 1.6%).
Activity -
e Mental health conditions remain the single most common cause of longer term
absence with 17% of occurrences and 31% total absence days, a slight increase
at P6 2016/17. Awareness training continues to be rolled out to all teams.
e There has also been an increase in the number of users of the online ‘Help’
Employee Assistance and Lifestyle Online websites possibly in response to
recent increases in absence but also due to improved awareness of resources.
dates
POST OFFICE
BOARD
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PAGE 1 OF 1
Post Office Limited Board Meetings
Author: Alwen Lyons — Meeting date: 24 November 2016
Executive Summary
Context
The Directors are requested to note the future meetings dates scheduled in respect of
Post Office Limited Board meetings.
Input Sought
The Board is requested to note the future meeting dates.
The Report
Pate rime otes
Tuesday 31 January 2017 09.30 - 14.00
Tuesday 28 March 2017 09.30 - 14.00
Thursday 25 May 2017 11.15 - 15.30
Tuesday 27 June 2017 TBC Board Away Day 1
Wednesday 28 June 2017 TBC Board Away Day 2
Tuesday 25 July 2017 11.15 - 15.30
Tuesday 26 September 2017 09.30 - 14.00
Tuesday 31 October 2017 09.30 - 14.00
Thursday 23 November 2017 11.15 - 15.30
Board November 2016
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8
POST OFFICE ADVISORY COUNCIL MINUTES
Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ
Thursday 3 November 2016
Attending: Tim Franklin, Chair POAC
Paula Vennells, Chief Executive, Post Office Limited
Council Members: Andrew Moys
Ben Lucas
Brian Scott
Chris Feliciello
Claudio Pollack
David Foley
Elizabeth Armstrong
Farida Iqbal
Ismail Loonat
Jenna Khalfan
Katie Evans
Kevin Twynholm
Lynn Simpson
Marc Kidson
Marcus Buck
Maxine Stone
Nick Stuart
Nilesh Joshi
Pardeep Duggal
Rebecca Glenapp
Theo Bertram
Tim Coomer
Post Office Limited: Paula Vennells, Chief Executive
Alwen Lyons, Company Secretary
Mark Davies, Communications and Corporate Affairs Director
Jane Hill, Head of Public Affairs
Martine Munby, Public Affairs
Martin Kearsley, Banking Director
Angela Van den Bogerd, Director of Support Services
Welcome Tim Franklin
The Chair welcomed the members of the Council and thanked them for attending the meeting,
passing on apologies for those who were absent. He welcomed the new council members:
82 of 192
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e Jena Khalfan - the Communications Director of the NFSP who has been working alongside
members of the Post Office Communications team on communications to subpostmasters.
© Claudio Pollack - the interim Director of Post and Telecomms at Cita. (The Chairman
explained that Any Burrows had left Cita and thanked him for his contribution to the
Council).
© Katie Evans - from the Money and Mental Health Policy Institute; and
© Maxine Stone - the Branch Manager from Scarborough Directly Managed Branch who would
take over the role of representing that part of the post Office network.
The Chairman explained the plan to extend the membership further by recruiting two more
subpostmasters, a WHSmith representative and a person to champion disability and access issues.
Existing Council members described the work of the Council to date and recognised that the Post
Office had responded well to the challenges from the Council.
The Chairman welcomed the CEO.
Business Update: Paula Vennells, Chief Executive (CEO)
Paula Vennells POAC Speaking Note
Firstly I’d like to echo Tim’s welcome to Maxine, Jenna, Claudio and Katie — I really value the role of
the Post Office Advisory Council to our business and it’s fantastic to see new members with fresh
perspectives to add to those who've been contributing so brilliantly over the last three years. The
CEO promised to circulate the report by Katie Evans on digital development. ACTION: MM
The CEO explained that the business had just started a new piece of work on Brand and asked
Marcus Buck if Martin George the Commercial Director could contact him to use his expertise in
this area. Marcus Agreed. ACTION:
MG
L300 Event
A couple of weeks ago, leaders from all over the Post Office got together for a full day to talk
through our strategy, progress and agree what we need to do more of, or less of - or differently.
We invited postmasters and engagement champions to join our discussions for part of the day. This
was a watershed moment for the business when we recognized the priority we must place on
supporting our postmasters — so their businesses, and our own, can flourish.
So what did we learn?
@ We have come a long way. Talking with postmasters from across the country underlined
that. We are now genuinely in a position where we can talk not just about a proud heritage,
but the future we are creating together, too.
© However, for all we have achieved through our transformation, I heard from all our
postmasters that we have so much more to do.
¢ They told us that, whilst we are Simpler to Run than we once were, we are still far from
being really simple.
@ We need to make our systems and processes quicker and easier to operate so that we give a
better, faster and more accurate service to our customers.
© Acouple of examples:
© Labels that are too big for small parcels and obliterate part of the address, so Post
Office colleagues have to try to wrap them around the corner of the parcel, which
then doesn't help Royal Mail scanning. We worked with Royal Mail to produce the
(small) stamps for self-service kiosks (SSKs), surely we can help here.
o Or actions that take three forms, or four conversations, when they could be one click
© This is all so important. That’s why the main session today will look at how we can become
simpler to run.
¢ We also learned that to become Better for Customers, we should be more purposeful in
setting their expectations. For example
© Letting customers know what products are available and in which branches which is
a challenge
© Shouting more loudly about the big improvements we have made to network
environments and opening hours (this is something that you highlighted during the
session on the future of the network in March)
o Thinking how we maintain the unique relationship between our postmasters and
their customers when increased automation helps us provide a good service.
We are moving to calling our Crown Branches Directly Managed Branches as a better description for
this part of the network as ownership is irrelevant to our customers. Directly Managed Branches are
still important but we will continue with the franchise programme when opportunities arise.
So, while we've achieved so much over the last few years, there’s still a long way to go until we have
a business that really is simple to run; and the best it can be for customers and a great place to work.
And this is a journey we are making in a world that feels very different to a year ago:
* Anew Prime Minister, cabinet and ministerial team
© Areshaped opposition party
© The prospect of a new relationship with the EU
There’s no sign of this change relenting and the uncertainty in the British and Global economy as we
exit the EU.
We are about to enter into our own funding negotiations with Government as well as contending
with continued shifts in consumer needs and demands.
It’s a potentially unsettling time. So it is more important than ever to be clear on our strategic goals.
© Strengthening our branch network
¢ Driving growth in Financial Services
Safeguarding our position as the UK’s number 1 letters and parcels retailer
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© Delivering a lean and competitive cost base
Period 6
+ Latest financial results show how the external environment is getting tougher and Post
Office benefits as a wide portfolio business.
+ Ourkey EBITDAS measure is just still positive to target year to date, with Mails performing
well up year on year. Brexit has had an effect on the FS sales, and Government Services
continues to decline.
* Digital income is a brighter spot — positive to target and so are our customer measures —
effort, net promoter score are all performing strongly.
* And Network Transformation has exceeded its half year targets — over 700 branches
modernised, over 25 a week on average, - a further impressive performance illustrating the
pace of the investment into change we are making in the network.
* So the picture is mixed at the half year — we have put in some good performances and
moved the business forward but we do have clear risks with income which are leading to
risks in EBITDAS .
* We do have the momentum to get back on track. That means a real focus on sales, on
income and product profitability. We have the busy winter and Christmas period ahead and
we need to plan and maximise our performance and income from this time.
Disciplines of tight cost control and a firm approach to discretionary spend are needed at all times —
but the income position at the present time does mean a specific focus. This is why we remain
focussed on costs and we recognise that we need to change the shape of the cost base.
The Post Office needs to move beyond breaking even, we need to not only start making a profit, but
to make enough of a profit to invest back into the Business which means c£100m a year.
Questions from the Council for Paula Vennells, Chief Executive (CEO)
1. Why do you think the Mails business continues to do well in the market whilst FS is doing
less well?
Customer research shows that customers like to use the PO to drop and collect parcels,
security and knowledge are considered to be strengths. Home-shopping returns have seen
significant growth. The CEO was still frustrated that digital sales were not developing quickly
enough. However because of growth in parcels and returns the mails income was holding up
despite the competition in the market.
Financial Services growth depended on the Bank of Ireland managing its balance sheet and
with low interest rates and little money to make on savings this was having an effect on the
Post Office position in the market.
2. Can the Post Office make the £50-100m operating profit required to invest?
Three years ago the PO was making an operating loss of £120m. There is a long way still to
go but the progress has been exceptional and we will start making an operating profit next
year. Most businesses would have the ability to borrow externally to invest, but our
Government ownership makes this difficult.
Although the Government are our shareholder the DWP, a Government department is
sending out letters to customers to move away from the Post Office Card Account?
The CEO stated that this was DWP strategy as they want benefits paid into bank accounts
and have been very clear that this is their policy. So we are working with the Government to
see if we can provide a simple bank account, a ‘jam jar’ account to help people
compartmentalise their money for paying bills.
Where does the Post Office relate to the pos- Brexit Government narrative? In the past it
was seen as the community hub in the big society debate. How will it be seen in an
environment focussed on economic reform?
Still an important part of society helping make life work for people. The CEO believed that to
sustain a community required 3 things; a Postal Services; Banking Services and a retail shop.
The PO could provide all three. 5000 community shops, without POs were only just surviving
and 2000 of these might be the place to put a new PO, so there may be an expansion plan
going forward.
Mark Davies explained that the narrative was about the PO making life easier for people by
developing essential services in a community hub, with retail, cash and postal services.
With all the changes going on employee engagement and employee morale were both low
and some of the choices made for relocating Directly Managed branches into the basement
of WHSmiths had produced press criticism. Was the CEO seeing things through rose tinted
glasses?
The CEO acknowledged that for communities within the PO the changes had been very
tough. The pension scheme closure had had a significant effect on people but following the
advice from the actuaries the proposal put to the Trustees was believed to be the right one.
The last scheme valuation had been done in 2012, but another was underway at the
moment.
The CEO did not believe she saw things through rose tinted glasses although she remained
an optimist, never forgetting the effect change was having on colleagues in the Business.
Could the Post Office offer receipts to email addresses so collecting customer contact
details?
The CEO thought this was an excellent idea and would pursue it with the Commercial
Director. ACTION: MG
The Chairman thanked the CEO for her contribution to the meeting.
The Chairman welcomed Martin Kearsley, Banking Director to the meeting.
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Martin Kearsley (MK): Update on the Banking Services
MK explained the significance of the Banking Services Framework and the move from bespoke bank
contracts to one overarching framework. Old contracts forbade any marketing as banks did not want
customers to use the PO. So took the step to terminate all the bank contracts and offer the banking
services frame work in place of the old contracts.
This contract is important because banks are closing as the requirements for cash reduce, so PO will
provide these services but only through a contract which makes commercial sense. So from January
this will increase the footfall for POs as banks move out of rural and market towns. This could be
difficult for POs and could increase queues which is why it is also important to simplify and
standardise the transaction, moving them away from paper to chip and pin.
Local advertising campaigns will be run where banks close, and a wider national campaign also be
run possibly showing a Sunday bank transaction in a PO.
The Banking Framework will take effect from 2017 and more services will be added through the
year. An App for businesses to find their nearest bank branch will be launched within the next 9-12
months.
‘A council member suggested that the Business look to provide a PO in the 24 enterprise zones to
offer banking services. Specific case of the Pfizer site in sandwich was raised as an example. Look to
see if there is an opportunity to provide banking services through a PO at the Pfizer site in
Sandwich ACTION: MK/KG
What banking services could be provided for SME? Could the Business work with the Institute of
Small Businesses? ACTION: MK
MK explained the restrictions in the contract, to stop ‘poaching’ bank customers by offering PO
accounts. When products are offered PO will need to make it clear they are PO products.
There is a limit to the size of cash deposits which locals can transact, will this £1000 be increased?
The £1000 is increasing to £2000 and this will capture 95% of deposits. If the services is standardised
and simplified it will make it easier for all branches including locals.
The Chairman thanks Martin Kearsley for his presentation.
The Chairman welcomed Angela Van den Bogerd, Director of Support Services,(AVDB) to the
meeting.
Angela Van den Bogerd: Making the Post Office ‘Simpler to Run’ for customers, postmasters and
colleagues
AVDB thanked the Council for their time and explained that she would like to get their input into
how the PO could be Simpler to Run.
AVDB explained her role and the work she had undertaken to rationalise 8 support services sites on
2, reducing duplication and improving communication between teams. She believed that Simpler to
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Run meant getting things right first time, by consolidation, standardisation and automation. The
changes would take 3 years to deliver and the project was at the half way stage.
AVDB believed there was still a lot to achieve through product and process simplification to reduce
the amount of paper used in transactions and to automate the processes.
The Council were split into 4 syndicates and asked to consider:
1. Postmasters - how can we make it simpler to get the right support at the right time?
2. Employees - how can we encourage employees to innovate and/or challenge barriers to
make ways of working simpler
3. Customers/SME - how can we make the customer’s experience simpler and better?
4, Business experts - as a business going through change, how can we make the change process
simpler?
Syndicate Feedback
1. Postmasters
Make communication timely and relevant
Explain processes in more detail — why is something done
© ‘one network’ welcome still developing
Publicise common issues, honestly and give the solution
© Simplify Horizon as a tool especially for locals
Simplify back office processes
© Integrate everything onto one till
«Training a bit earlier too much to take on whilst doing the job
© Better lead in time for products, give people time to get ready
2. Employees
¢ Engagement does not mean people are happy with what is going on
© Works well where there is good two way communication and accountability both
ways
Leaders need to be held to account by the shareholder but also the employees
© Ownership is an issue for those in DMB as it means their jobs
« Communication to encourage people give then a reason to believe
Celebrate when we do take ideas on board and it changes things
* Broaden successes, focus on changing what you can don’t give up.
© Tell people what is getting on the way
3. Customers/SMEs
© Important how we digitally capture date and make it easier to do business
© Want to interact in different ways, online, telephone, face to face.
Tell SMEs when to come in, good service times, times to avoid.
© Email receipts
¢ Bookable time slots
Automate print forms at home then bring in
© Do as much as possible before the visit, eg parcels make it easier to come in
prepared
4. Business Experts
Clarity about the critical pillars going into change
¢ Clarity about progress being made
Involve those impacted by the change
© 2or 3 things trying to achieve eg 50% of customers self-serve.
Moving toward what customers want not just stripping cost out.
Angela thanked the Council for their input which would be fed into the ‘Simpler to Run’ project. She
explained that she was using a blended approach to her change project involving change experts and
the teams involved, so people were doing change to themselves. Middle managers need to be the
conduit for their team’s ideas, and the feedback loop to their teams.
The Chair thanked Angela who promised to feedback what actions had been taken to a future
Council meeting. ACTION: AVDB
Summary and Conclusions: Tim Franklin
The Chairman thanked the POAC members for their contributions especially the new members who.
had found the debate interesting.
The Council asked that future agendas include more information to enable Council members to
prepare for the debates. ACTION: JH
It was agreed that the new time slot starting with lunch and meeting in the early afternoon was
more convenient for Council members.
Martine would re-launch the POAC portal where members could feedback their branch
experiences ACTION:MM
The Council asked for an update on the Digital session held at the last meeting ACTION: MM
The date of the next meeting was confirmed as March 15" 2017, to which the ClO would be invited.
The Chairman closed the meeting, thanking the Council for their input and asking for any feedback
to be sent to Martine Munby.
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Appendix A — Flip Chart Feedback
Sydicate 1
« No incentive for agents to push people on line
© More support for agents on professional website design
¢ Live information on branches — eg status of AEI, queues etc
© Ability to rate and feedback on POs
° Free Wi-I
Capturing customer data electronically
iin branch
© Click and collect drives people in branch — promote this and look for other opportunities
* Clarify ID verification services
* Consistent and clear branch information
® Online community based around Postmasters
© Better management of branch finder
e Central v local information
Syndicate 2
e Postmasters share best practice/tips
¢ Attribution
¢ Collect discount
© Data/customer
° Classified
e Remuneration
¢ Footfall drivers — click and collect
.
NB Syndicate 3 gave verbal feedback
Syndicate 4
Agents:
* Database for agents to see when policy renewal dates come up
¢ Shared database of customer info
*® Mobile enabled/simple/apps
© Wi-Fi hub
Customers:
© simple
* Profile of customer data
Scheme of data capture
© Loyalty scheme with incentives
¢ Provide info on products and services
* Post Office advertising notice boards
e Feed from feedback
© Bank with Post Office — get free advertising on our website
© Web page per area
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Communities
© Link journey on line to branch
© End to end, drop product off on line
© Parcel check service
© Digital barcode created on app and then take parcel to the Post Office
Annex B
Syndicate 1
Branch Finder design:
Design Access:
© Opening hours
© Content
eServices
© Education/digital/apps
© Recruitment — Postmaster, Apprentices
Connecting — Postmasters (social and collaborative)
e Small ideas and lessons
© Events
© Blogs
Training
© WiFi
¢ Module based
© Show and tell
Innovation
© Insight
e Self Drive
© Engagement
Marketing
¢ Promotions
e Footfall
¢ Big opportunity
© Engage
© Community
© Brand
* Progressive
Postmaster at the heart of digital:
e Listen
« Engagement and feedback with Postmasters
© Impact of solutions
¢ Automation — SSKs
e Education
e Incentive
© Horizon — process
Digital
© Engagement/communications
© Transact — device — customer experience and access.
Internal digitisation
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e Technologs
Syndicate 2
Branch Finder:
© Geo location based map
® Opening times based in time/day “open now until 6pm”
© Individual Postmaster data
Branch search:
* Search term and Post Office
e Location
© Opening hours
¢ Branch phone number
© Google reviews
© Business ownership
Syndicate 3
Branch Finder:
© Centrally managed
© Use existing resource (eg IMAPs)
© Link through to local branch website
© Map based and interactive
Hover button to reveal products and services and opening times
Main site
¢ Products
© Opening hours
¢ Contact details
© Click through:
© Customer/feedback
© Option to buy service
*® Online (postmaster incentive)
Cluster products and cross sell
Two Way traffic
« lecollect travel money in branch
* Customer contacted via branch finder
Syndicate 4
Branch Finder
¢ Identify nearby Post Offices via individual’s location
* Information on local branches:
e Hours
e Address
e Postmaster
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¢ Phone no
© Accessibility/parking
© Busy times
© Click through to community info hub
© Products and services (drop down list with other branches)
e Products (drop down)
© Click through to the main Post Office site, banking site and Postal app
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Post Office Ltd
Post Office Board
24 November 2016
Location:
Room 1.19 Wakefield, Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ, United Kingdom
ATTENDANCE LIST
ATTENDEES SIGNATURE
Parker, Tim
Callard, Richard
Cameron, Alisdair
McCall, Ken
Paula, Vennells
Stent, Carla
Tim, Franklin
Virginia, Holmes
Also in attendance
Alwen, Lyons
Additional access
MacLeod, Jane
Wechsler, Tom
Post Office Board Agenda
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Present
24" November 2016 + Tim Parker ( Chairman) if
+ Richard Callard .
+ Tim Franklin
15.15hrs * Virginia Holmes
* Ken McCall
* Carla Stent
Room 1.19 Wakefield * Paula Vennells
in Attendance
Alwen Lyons
Martin Edwards (item 4 & 6)
+ Martin George (item 6)
+ Mark Siviter (item 6)
Nick Kennett (item 7)
+ Angela Van Den Bogerd (item 8)
+ Rob Houghton (item 8)
None
Start Time
11.15hrs
Finish Time
+ Alisdair Cameron
Apologies
Agenda Item Action Needed Timing
1. Minutes of previous Board and Decision Minutes formally agreed. Alwen Lyons 11.15— 11.20
Committee meetings including
Status Report
2. CEO Report For noting CEO to update the Board on the report CEO 11.20-11.50
Including IR update and Digital
Christmas Campaign
3. Financial Report For noting CFO to update the Board on results. CFO 11.50 - 12.10
4. Update on Funding Process (verbal) —_ For noting CFO to update Board on latest progress CFO / Martin Edwards 12.10 - 12.30
5. Board Effectiveness Review For noting To familiarise the Board with the Board Alwen Lyons / Ken McCall 12.30 - 12.50
Introduction
Effectiveness review process.
Transformation Business Case.
a ce a 12.60 -13.20 I
6. For noting To update the board on progress made since Martin George / Mark 13.20 - 14.20
June on Post Office and Royal Mail joint strategy, Siviter / Martin Edwards
next best alternative, negation preparation and
next steps.
7. Report from POMS Board For noting To update Board on half year performance and Nick Kennett 14.20 - 14.35
strategy.
8. Back Office Transformation For approval For Board to review / approve the Back Office Angela Van Den Bogerd / 14.35 — 15.00
Rob Houghton
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Post Office Board Agenda
Agenda item Action Needed Purpose
9. The acquisition of Broadband For ratification To ratify the decision taken by correspondence. Alwen Lyons 15.00 — 15.05
Customers from New Call
10. ‘Items for noting 15.05 — 15.10
10.1 Sealings For noting Board aware of the affixing of the seal.
10.2 Health & Safety For noting To update Board
10.3 Date of next meetings For discussion To confirm Board dates for future meetings
11. AOB 15.10 - 15.15
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Post Office Limited — Strictly Confidential
POLB 16(8")
POLB 16/62 - 16/71
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.30am on 25 October 2016
at 20 Finsbury Street, London EC2Y 9AQ.
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive
Alisdair Cameron Chief Financial Officer
In Attendance:
Alwen Lyons Company Secretary
Martin Edwards Director of Strategy (Minute POLB 16/66 and POLB 16/67)
Mark Davies Corporate Affairs Director (Minute POLB 16/66)
Nick Kennett Group Financial Services Director (Minute POLB 16/67)
Rob Houghton Chief Information Officer (Minute POLB 16/67)
Jonathan Hill Head of Risk, Banking, Regulation and Strategy, Financial
Services (Minute POLB 16/67)
Owen Woodley Sales Director (Minute POLB 16/67)
Chrysanthy Pispinis Financial Services Corporate Development & Governance
(Minute POLB 16/76)
Neil Hayward Group People Director (Minute POLB 16/68)
Natasha Wilson Director of Reward and Pensions (Minute POLB 16/68)
Apologies: None
POLB 16/62 INTRODUCTION
(a) The Chairman noted that a quorum was present and opened the
meeting.
(b) The Directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the
Company's articles of association.
POLB 16/63 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE MEETINGS
INCLUDING STATUS REPORT
Minutes
(a) The minutes of the Board meeting held on 29" September 2016
were approved as an accurate record and the Chairman was
authorised to sign them.
(b) The Board noted the Action Status Report.
POL Board minutes, 25 October 2016 1 Draft
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Post Office Limited — Strictly Confidential
(c) The Board discussed Action POLB15/50 (b) and the effect of
classifying the closure of the Supply Chain external work as
discontinued business and therefore an exceptional item in the
accounts. The Board recognised that the work had been discussed
at the time of budget setting and acknowledged that it would have
been inappropriate to include it in any budget before the consultation
with employees had been concluded.
(d) The Chair of the Remuneration Committee stressed the need for
transparency when setting the bonus targets and assessing
performance against those targets. The CFO would continue to
disclose the exceptional charges at the ARC and he assured the
Board that any effect on the EBITDAS would be transparent to the
Remuneration Committee.
POLB 16/64 CEO REPORT
(a) The CEO introduced the CEO Report, focusing on the following key
points:
(b) Period 6 Results: Performance continued to be challenging and
although the CEO remained reasonably confident that the full year
EBITDAS target would be delivered, the gross income trend
remained a concern.
(c) Pensions: The CEO updated the Board on the decision of the
Pensions Trustee to accept the proposal to close the Post Office
Section of the RMPP on the 318' March 2017. She thanked Virginia
Holmes for her support.
(d) Industrial Relations: The CEO reported that the CWU and Unite
unions had called for strike action on the 31% October. The Board
was assured that contingency plans were in place to ensure there
would be as little adverse effect on customers as possible. The CEO
explained that discussion continued with the unions but that there
would likely be further strikes in the run up to Christmas.
(e) I POca: The CEO explained that the details of the supplier contract
would be presented at the November Board meeting. The Board
asked the CEO to ensure that a wide range of options for payment
provider be considered.
(f) Apprentices and Graduates: The CEO updated the Board on the
presentations she had received from the apprentices and graduates
who had recently joined the Business. The standard was excellent
and she was excited by both their enthusiasm and their focus on the
commercial and social purpose.
(g) Mails: The CEO explained that the Mails team was continuing to
engage with the RMG whilst looking at the next best alternative
strategy. The Board was nervous about the RMG delaying the
discussions and the CEO assured them that should deadlines be
missed she would escalate the matter with the CEO of the RMG.
Ken McCall reported his meeting with the Mails team and the need
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to test the viability of alternative solutions. It was understood that the
Mails strategy would be discussed at the next Board meeting.
Transformation Report
(h) The Board noted the Transformation Report. Transformation risk
would now be included as a standard agenda item for the ARC and
the Board asked that the ARC specifically consider:
ACTION: e The aggregated cost and burn rate compared with
David Hussey business cases and budgets; and
¢ The impact of IR35, ‘off payroll’ working, the impact and
risk mitigation.
(i) The Board noted the CEO report.
POLB 16/65 FINANCIAL REPORT AND UPDATE ON THE DEVELOPMENT OF THE
P6 RESULTS.
(a) The CFO introduced the Financial Performance Report for Period 6,
September 2016. The CFO was forecasting that the Business would
hit the EBITDAS target for the year, but good Christmas trading
would be key to delivering the £-10 million.
(b) Cash flow headroom had not improved as predicted in P6 as
additional cash had remained in the network after the strike
contingency planning. However this position had been recovered
during P7.
(c) The Board discussed the Working Capital Facility and the
opportunity to reduce the cash strain on the Government as part of
the funding negotiation. The CFO explained that the most difficult
areas to manage were coin distribution and Foreign Exchange cash.
However if postmasters were incentivised to change their behaviour
this could facilitate another change in supply chain demand and free
up cash to use elsewhere.
(d) The CFO explained the additional pressure on the 2017/18 target of
£28m, which would flow into the baseline for the strategy and funding
plan. The Board agreed that it was important to have a realistic
ACTION: CFO baseline for the plan, and asked the CFO to provide trend income
analysis in the Financial Reports to enable the Board to monitor
the income streams. The Board recommended that the 2017/18
budget should be realistic and based on flow through from the
2016/17 operational outturn, with initiatives to deliver the
contingency to get back to the £28m target.
(e) The Board approved the P6 Income Statement, Balance Sheet,
Cash, Headroom and Forecast positions
(f) The Board noted that external supply chain activities have been
reclassified as discontinued operations subject to Ernest Young’s
(EY) agreement.
(g) I The Board agreed that from P7 Actuals v Forecast comparisons
would be monitored.
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POLB 16/66 STRATEGIC PLAN TO 2020/21 AND FUNDING REQUEST
(a) The Chairman welcomed Martin Edwards, Director of Strategy and
Mark Davies, Corporate Affairs Director, to the meeting.
(b) Martin Edwards presented an overview of the 2020/21 strategy,
explaining the financial consequences of the counterfactual case as
opposed to achieving commercial sustainability through funding a
major cost base restructure.
(c) The Board discussed the proposals and stressed the need to
strengthen the explanation and narrative behind the counterfactual
case and to include ranges within the projections.
(d) The CEO recognised that because of the good work done to date in
delivering Network Transformation, and the current stability of the
network, it would potentially be difficult to persuade Ministers that
there was still a cost base crisis which needed to be addressed.
(e) The Board asked for assurance that the necessary evidence was
available to support the funding case. The CFO explained that the
Group Executive had worked though and agreed the assumptions in
the plan, which were supported by market analysis and business
cases. The BEIS team had employed KPMG to review the funding
request and Martin Edwards would work closely with Richard Callard
and his team to present the case.
(f) The Board discussed the revenue projections and agreed that the
business had to aim to be sustainable without relying on FS growth.
ACTION: The Board asked Martin Edwards to consider how the size of
Martin Edwards the network could be used to deliver income through an access
fee, similar to that for paid for the banking framework or identity
products.
(g) The Board recognised the uncertainty within the income projections
included in the plan, but stressed that the cost base remained more
in the control of the business. The funding narrative needed to make
it clear that it would be impossible to change legacy IT systems and
reduce the cost base without funding support from the Government.
(h) The Board discussed the segmentation of the network into
commercial and social branches and possible changes to how these
could be funded. It recognised that product simplifications and a
reduction in postmaster remuneration would put pressure on some
postmasters, but believed that there could be an opportunity to
restructure the franchise to sell it more as a footfall generator.
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(i) The Board agreed with the four success criteria set out in the
narrative document, namely that by supporting funding the
Government would secure:
« Agrowing, flourishing network — although not with any binary
network number to hit;
e Permanently lower funding;
« Indispensable service to customers and communities; and
e Options on ownership — without referring to a mutual option.
(j) It was recognised that there would need to be more detail in the
funding request with analysis on £320m investment and the resulting
deliverables. The Board advised that the funding request had
different audiences and would require different explanations to align
with their priorities accordingly. The Board recommended that
greater focus be given to SME customers.
ACTION: (k) The Board supported the direction and funding proposal and
Martin Edwards asked for more information on the investment and returns to be
presented at the next Board meeting.
ACTIONS: (l) The CEO suggested that Martin Edwards could provide
Martin Edwards additional information on a one to one basis if any Board
member required.
(m) The Board approved the strategic plan to 2020/21 and funding
request prior to submission to the Government in early November.
(n) Mark Davies left the meeting.
POLB 16/67 FINANCIAL SERVICES GROWTH STRATEGY
(a) The Board welcomed Nick Kennett, Group Financial Services
Director, Jonathan Hill, Head of Risk, Banking and Strategy
Financial Services, Chrysanthy Pispinis, Financial Services
Corporate Development and Governance, Owen Woodley, Sales
Director, and Rob Houghton CIO to the meeting.
(b) Nick Kennett reminded the Board of the strategic direction for Post
Office Money (POM) approved at the June meeting, with the
interdependent key components of:
« The New Normal customer proposition;
e The ‘Strong Integrator’ business model; and
e The re-negotiation with the Bol.
(c) Nick Kennett stressed that the FS strategy meant a change to focus
on the customer relationship and lifetime value, and a move away
from the primary delivery in branch to a digital channel. He added
that the delivery of the strategy required a significant change in how
the business was run, with enhanced capabilities, risk management
and governance structures, changed relationships with suppliers
and partners, supported by agile technology.
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(d) Nick Kennett explained that investment, which had been included in
the wider 2020/21 strategy plan and funding, would be required for
IT development in support of the new model. The ClO stressed that
the investment should focus on delivering one product at as low a
cost as possible to test the proposition with both customers and
revenue earning protection. Further products could then be added
incrementally. The ClO believed that the initial investment could be
around £8-10m but needed further definition as it depended on the
product chosen and the level of systems integration required with
the product provider. The Board supported this initial investment.
(e) Nick Kennett confirmed that the overall funding request was £72.3m
over five years, of which £37.4 related to capex. This investment was
targeted to deliver gross income in 2020/21 of £156m and EBITDAS
of £68m, an increase of £30m. The overall NPV was £181m over
five years.
(f) The Board asked for assurance that the development would not
complicate the IT transformation currently underway. The ClO
assured the Board that the system would be developed separately
and only integrated into the Post Office systems if tests proved it
could be incorporated without causing issues.
(g) The Board agreed to plan to make the full investment as proposed,
depending on the success of the initial investment, and discussed
the most appropriate structure and governance for its delivery.
(h) Nick Kennett advised that the paper did not include recommended
changes to the organisation structure and regulatory position as this
had not been discussed at GE. CS explained that, based on her
experience with FinTech companies and major banks, for this new
business to work effectively the Board and management should
think in a new way, enabling a separate innovation hub supported
by people and a new governance environment. Ring-fencing the
team working on the business development would assist faster
change, particularly if the project deployed a compartmentalised,
“test and learn” methodology. There was support of this from across
the Board.
(i) The Board discussed the FS sales model and the move from
Financial Specialists in Directly Managed branches to a CRM model
training postmasters’ staff to use a portal and tablet to capture
customer data. Owen Woodley explained that the CRM model was
underway as a trial which would need to prove it was profitable for
the business and the postmaster.
(j) The Board supported the recommended options and direction of
travel principles in relation to technology structure, the distribution
model and the shape of the funding and emphasised to the
executives that it would be important to build momentum into the
change programme.
(k) Nick Kennett, Martin Edwards, Owen Woodley, Jonathan Hill,
Chrysanthy Pispinis and Rob Houghton left the meeting.
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POLB 16/68 PENSIONS VERBAL UPDATE
(a) The Chairman welcomed Neil Hayward, Group People Director, and
Natasha Wilson, Director of Reward and Pensions, to the meeting.
(b) Neil Hayward updated the Board on the decision taken by the
Pension Trustee to accept the proposal to close the DB pension plan
on the 31%' March 2017. He reported that the approach to the
consultation had been validated by the Pension Regulator.
(c) Face to face briefings were now planned to explain to DB scheme
members the summary of the consultation; what would happen to
the surplus after the current valuation; what the move to the DC
scheme would mean to members; and the next steps in the process.
A pensions’ website was also being launched where members could
access information.
(d) Natasha Wilson reported that the scheme valuation should be
available in the first two weeks of November and this would help to
make the position clearer for members.
(e) Natasha Wilson explained that a Governance Committee was being
set up to give oversight to the DC scheme and that she was working
with the Chairman of the DB Trustees to identify an independent
ACTION: trustee to invite onto this committee. Richard Callard asked to be
Natasha Wilson kept updated on the establishment of the Governance
Committee.
(f) The Chairman thanked Natasha Wilson on behalf of the Board.
(g) Neil Hayward and Natasha Wilson left the meeting.
POLB 16/69 UPDATE FROM BOARD COMMITTEE
(a) Remuneration Committee _(RemCo)
The Chair of the RemCo updated the Board on the meeting held on
the 29" September 2016.
« He reported that PwC had been appointed as the new
Remuneration Committee Advisor.
« The CEO had recommended that the Group Executive
should receive a pay award of 1.9% similar to the rest of the
Business, which the RemCo had noted.
«The STIiP target for the CEO and CFO bonuses, which had
been agreed with the last Government Minister, had now
been further delayed by the Ministerial change. Because of
this delay the RemCo had decided that it would not be
advisable to ask for a recalibration of the LTiP target for
2016/17 as it was now too late to do so.
e Neil Hayward would be presenting the timetable for future
bonus target submission at the November Committee.
(b) Nomination Committee (NomCo
The Chair of the NomCo updated the Board on the meeting held on
the 29'" September 2016, at which the Committee had discussed the
Group Executive succession plan.
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POLB 16/70 ITEMS FOR NOTING
Sealings
(a) The Directors resolved that the affixing of the Common Seal of the
Company to the documents numbered 1451 to 1453 inclusive in the
seal register was confirmed.
(b) Future Meeting Dates
The Board noted the future meeting dates.
(c) Health and Safety
The Board noted the Health and Safety report.
POLB 16/71 CLOSE
(a) There being no further business, the Chairman declared the meeting
closed.
(b) The Board attended a session presented by Linklaters covering,
‘The changing regulatory environment — The impact of the senior
manager and certification regime, on the Financial Services sector.’
Chairman Date
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POLARC 16(6")
POL ARC 16/41 - 16/53
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 2.30 pm on 28" September 2016 at 20 Finsbury Street, London EC2Y 9AQ
Present: I
Carla Stent Chair I
Richard Callard Non-Executive Director (RC)
Tim Franklin Non-Executive Director (TF)
Ken McCall Non-Executive Director (KM)
In Attendance:
Paula Vennelis Chief Executive, (CEO) i}
Alisdair Cameron Chief Financial Officer (CFO) I
Jane MacLeod General Counsel (GC) I
Nick Kennett Financial Services Director and CEO of POMS (NK)
Alwen Lyons Company Secretary (CoSec)
Mike Morley-Fletcher Head of Risk and Assurance (MMF)
Paul Hemsley Financial Controller (PH)
Peter Mclver Ernst & Young (PM)
Elena Belyaeva Ernst & Young (EB) /
Kevin Gilliland Network and Sales Director (KG) (Minute POLARC 16/42 to I
16/44)
Jonathan Hill Head of Risk, Governance and Development (JH) (Minute
POLARC 16/42 to 16/44)
Owen Woodley Sales Director (OW) (Minute POLARC 16/42 to 16/44)
Amanda Bowe POMS, Non-Executive Director and Chair of POMS ARC (AB)
(Minute POLARC 16/42)
Susie Hayward POMS, Head of Risk and Compliance (SH) (Minute POLARC.
16/42)
Gordon Gourlay Bol, Managing Director of Post Office Businesses (GG) (Minute
16/43)
Alec Hughes Bol, Head of Post Office JV Compliance (AH) (Minute 16/43)
Rob Houghton Chief Information Officer (RH) (Minute POLARC 16/48)
Tim Parker Post Office Chairman (TP) (Minute POLARC 16/43 to 16/50)
POLARC 16/41 INTRODUCTION
(a) A quorum being present, the Chair opened the meeting. The
directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the I
Company's articles of association. I
POL ARC, 28" September 2016 1
Strictly Confidential
(b) The Chair welcomed attendees from Post Office (POL) and Post
Office Management Services (POMS) who had joined for the
Financial Services discussion.
FINANCIAL SERVICES
POLARC 16/42 POMS
(a) POMS ARC Report. AB presented the report from the POMS
ARC and highlighted the good progress made over the last year
to put in place a Risk Management Framework, the high level
“policies, and a process for reporting any incidents or breaches.
Going forward, POMS would focus on deploying the Risk
Management Framework.
(b) The POMS ARC recognised the importance of the relationship
between POMS and POL as its Appointed Representative (AR)
and the need to ensure both entities worked together to deliver
the required improvements and compliance.
(c) The Committee noted the report from the POMS ARC dated
13 September 2016.
POMS as Principal
(d) NK reported the recent FCA thematic review on ARs in General
Insurance and its applicability to POMS’ oversight of POL.
(e) He explained the role of POMS as a regulated entity and its
regulatory responsibility for POL as AR regarding the sale of
General Insurance products. Travel Insurance and over 50’s
Life Insurance were the products carrying the greatest conduct
risk as these were sold across the wider branch network.
(f) NK explained that the compliance risk of the POL Network was
the highest risk on the POMS Risk Register and rated adverse
to appetite. While there had been no indication of systemic
customer detriment from sales through the POL network, it was
a regulatory requirement that POMS should be able to provide
evidence and quality assurance from POL in relation to POL’s
own compliance with contractual and regulatory requirements
and its conduct risk framework. This included evidence that
agents and those of their staff who sold POMS products had
been appropriately vetted and trained. A new Horizon IT control,
which would enable POL to limit user access, and which had
been anticipated for delivery by POL in January, would be
delivered later.
(g) KG supported the introduction of the user access control.
(h) The ARC recognised the obligations and responsibilities of POL
as AR and the challenges of providing evidence of compliance
when selling the product through a large network.
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POLARC 16/43
ACTION: OW
ACTION: JH
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The ARC stressed the importance of implementing the new
control to manage user access and the Chair asked the
POMS CEO to provide a report setting out the timeline and
actions to deliver the requirement.
The Chair thanked AB for her report and assured her that the
ARC would continue to monitor delivery of the AR
accountabilities
AB and SH left the meeting.
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appropriately structured to encourage the right colleague
behaviours.
(g) I The ARC noted that Jane MacLeod, the GC was the 2™ and 3
lines of defence for the branch network. The GC explained that
this was not inappropriate in an immature business and could
be helpful in developing the appropriate culture. The Chair
suggested this be reviewed in the longer term.
A review the 2" and 3” lines of defence in the Post Office
ACTION: GC Money branch distribution model to be undertaken in
autumn 2017/18.
(h) The Chair thanked GG and AH for attending the meeting and
recognised how well the relationship had developed.
(0) GG and AH left the meeting.
POLARC 16/44 POL Financial Services
IRRELEVANT
(b) NK stated that he was less comfortable with the compliance
position in the agency Network, where inevitably there was
limited direct oversight. This was of particular concern for POMS
as Travel Insurance and Over 50s Life Assurance were sold
over the counter in the wider Network. While there was no data I
that would indicate that customers were not receiving I
appropriate products or guidance, the nature of the network and
the lack of user identification did not enable POMS to have the
level of comfort that it required — hence the concerns raised by
the POMS Board and ARC.
(a)
(c) NK explained that to reduce the risk POMS has decided to sell
Over 50s Life Insurance from only c.1,000 branches as part of
the implementation of a new product supplier in January. He
further explained that if POL was unable to deliver end-user
identification, the POMS Board would need to consider whether
travel insurance should also be withdrawn or at least restricted
—a position that would significantly reduce customer benefits
and POMS’/POL’s financial outcomes.
IRRELEVANT
(d)
ACTION: NK
(e) KG, JH and OW left the meeting.
POL ARC, 28" September 2016 4
POLARC 16/45
POLARC 16/46
ACTION: MMF
POLARC 16/47
POLARC 16/48
Strictly Confidential
MINUTES OF THE MEETINGS HELD ON 2574 JULY 2016
(a)
The minutes of the meetings held on 25 July 2016 were
approved as presented and the Chair of the Committee was
authorised to sign them as a true record,
POLICIES FOR APPROVAL
(a)
(b)
Investigations
The ARC approved the Investigations Policy.
Physical Security
The ARC approved the Physical Security Policy.
Financial Crime Policy
The ARC approved the Financial Crime Policy subject to the
alteration to include ‘possible prosecution’ as an outcome for
failure to comply.
Amend the Financial Crime Policy to include possible
prosecution as an outcome for failure to comply.
INSURANCE RENEWAL FOR RECOMMENDATION TO THE
BOARD
(a)
(b)
PH explained that the cover being proposed included a high
level of deductibles which meant that POL self-insured up to that
level. The ARC asked if consideration had been given to
complete self-insurance. PH explained that this had been
considered and would be considered every year before renewal.
NK suggested that once POMS was more established it could
look at offering insurance to POL.
The Committee recommended the renewal as set out in the
brokers’ report, for submission to the Board for its approval.
BOUNDARY/PERIMETER CONTROLS
FINANICAL REPORTING UPDATE
(a)
(b)
The Chair welcomed Rob Houghton, Chief Information Officer
to the meeting.
Financial Control Framework (FCF
The CFO updated the ARC on the progress being made to
develop the FCF. He said that the methodology being deployed
was entirely appropriate to financial reporting and could be
extended to other areas. The CFO explained that the majority
of finance processes had now been mapped and gaps
identified. The ARC asked for priority to be given to remediating
the higher risk gaps disclosed in the CFO report, such as
segregation of duties, and the CFO concurred. By year-end
gaps would have been mitigated, at least on a work-around
basis, controls self-assured and testing undertaken.
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(d)
(e)
ACTION: @)
PM/CFO
(9)
(h)
)
@
ACTION:
MMF/RH
ACTION: &)
David Hussey
Strictly Confidential
The CFO reported to the ARC that after discussion with the
Chair, the Shareholder and the External Auditors, a decision
had been taken not to produce Interim Accounts for the current
year. The resource saved would be used to focus on ensuring
that relevant controls were in place by the year end. EY audit
work would be accelerated but without duplication. EY and POL
were considering the need to repeat additional year-end
routines as the controls would not have been in place for the full
financial year.
The CFO noted that the controls and assurance of the accuracy
of the declared cash in the Network was under review.
The CFO explained the Finance System upgrade currently
being scoped relied on SAP for income reporting and would
eliminate the need to use multiple spreadsheets and feeder
systems. A detailed paper and business case for this investment
in SAP would be presented to the Board in November. The ARC
recognised the improvement that this change could bring but
were concerned about the time and investment required and
stressed that the implementation of the new system would be
key.
The proposed External Audit plan would be presented to
the November ARC meeting.
The Committee noted the progress made.
Controls Assurance
The CFO reported on the controls in place to give assurance to
the budget and funding requirement. He explained that UKGI
had engaged KPMG to provide assurance as to the funding
application. PM reported that EY had been approached to bid
for the work but that they would decline due to conflicts of
interest.
Risk Management Framework
MMF presented the Risk Profile and explained the changes
since the last report. The Industrial Action risk had improved
significantly despite the strike called by the unions. The CEO
explained that the effect of the strike had been well managed
and the Group Executive supported the reduced risk.
The ARC were surprised that the risk associated with IT
transformation and its effect on the flexibility to change systems
and controls was not included in the risk profile.
The ARC requested that this risk be added in the future.
The ARC agreed that Transformation risk needed more
scrutiny and asked that it be included in future agendas
and reports.
The Committee approved the 2016/17 Half Year Group Risk
Profile.
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POLARC 16/49 IT CONTROLS
(a)
ACTION: Rob
Houghton
(b)
(d)
(e)
(g)
(h)
End to End Control Framework and Cyber/IT Security
RH explained his plans to create an end to end control
framework for IT and the work underway to map the IT
landscape. This work would map the current state against the
necessary controls and required protections.
A paper would be presented at the November ARC outlining
the proposed IT control framework and the plans for its
implementation.
RH recognised the need to strengthen the IT team and
introduce people with expertise in IT security operations. He
assured the ARC that these appointments were underway. This
would bring the skill necessary to develop an IT security
operations centre with the right detection systems and capability
to monitor any IT security issues.
RH recognised that the current status of Cyber Security and
Information Assurance were outside the Board risk appetite in
three key areas as described in the paper. He admitted that he
would remain nervous until he could see the whole IT
environment in one place rather than being fragmented between
suppliers.
The Chair updated RH on the ARC discussion on system
changes required by POMS to introduce controls to limit Horizon
user access. RH assured the ARC that he was aware of the
required IT- changes and was working with the network and
training team to deliver them as soon as possible.
The ARC noted the paper on Cyber/IT Security,
Horizon Lessons Learned
The CFO explained that Fujitsu and Oracle had been unable to
determine the root cause of the Horizon systems failure but the
same failover/failback exercise which had caused the initial
failure had now been replicated successfully. It was believed
that the problem had been caused by the memlock processes
which had now been reconfigured.
The ARC was concerned that the root cause of the Horizon
failure had not been identified, and that the business incident
escalation processes had not worked. The GC explained that
changes had been made to address the deficiencies in business
continuity and a Business Protection team was now in place
with ongoing training and testing for different scenarios. The
incident escalation process would continue to be developed and
tested.
One of the issues highlighted by the Horizon failure was the
inability to communicate quickly with the Network. Standard
communications had now been prepared with a separate
communications channel should the Horizon system become
unavailable.
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The Committee noted the paper and commented on the lessons
learned.
RH left the meeting.
POLARC 16/50 BRANCH CONTROLS
(a)
(b)
(c)
(d)
(e)
(h)
BCV Lessons Learned
The CFO introduced the lessons learned paper and highlighted
the actions taken since the fraud had been reported to the ARC.
He stressed that management actions had already been taken
concerning the BCV fraud before it was reported to the ARC but
recognised that enhanced reporting was required and was now
in place. Greater transparency would mean more issues would
be reported but these issues were usually caused by non-
compliance or unintentional mistakes. The tighter controls being
put in place would help reduce the losses through early
intervention and, where possible, recovery.
The ARC applauded the transparency and recognised the work
underway to enhance reconciliations and increase
interventions. However they asked if those responsible for the
lack of escalation had been made accountable. The CEO
teported that changes to the senior leadership had taken place.
The Committee noted the paper and the verbal update.
TP left the meeting.
AML/CTF Framework
The GC updated the ARC on the HMRC AML/CTF audit. The
work had been slightly delayed and would be reported to the
November ARC along with finalised actions, dates and
accountabilities.
The Committee noted the status of the HMRC audit and the
initial draft findings of the Risk Assessment work.
Policies for Board Approval (AML and ABC)
The ARC recommended the Anti-Money Laundering and
Counter Terrorist Financing Policy, for submission to the Board
for approval
The ARC recommended the Anti-Bribery and Anti-Corruption
(‘ABC’) Policy, for submission to the Board for approval.
POLARC 16/51 QUATERLY AUDIT REPORT
(a)
(b)
MMF presented the Quarterly Audit report and explained that
although the audit programme was slightly behind plan it was
expected to catch up during the remainder of the year,
The ARC asked MMF to prioritise the review of IT governance.
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(c) The ARC noted the paper.
POLARC 16/52 ITEMS FOR NOTING
(a) The ARC noted the report on Business Continuity planning.
(b) The ARC noted the Contact Management paper.
(c) The ARC noted the Horizon Scanning paper.
(d) The ARC noted the Property paper.
POLARC 16/53 ANY OTHER BUSINESS
(a) The CFO reported that Postal Services Holdings Company
Limited (PSH) was planning to sign its report and accounts on I
the 3 October. The accounts would contain a subsequent
event note on IRIS and would note that a letter before action
had been received on 22" September in relation to notice of I
termination which had been given in respect of a 3” party I
contract in Supply Chain. I
(b) The GC explained that a letter before action claim had been I
received relating to the Supply Chain withdrawal from the
external market. The letter claimed an abuse of a dominant
market position, and alleged that withdrawal could have an
adverse impact on Somali communities. The legal team was I
dealing with the letter, however there was a risk of adverse I
publicity. I
I
t
(c) There being no further business the Chairman closed the
meeting.
“Chairman
POL ARC, 28% September 2016 9
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POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: November 2016
Executive Summary
Context
Our goal for 2016-17 is to achieve Our 3 year goals are:
EBITDAS of (£10m). 1. To accelerate the transformation
of Post Office.
2. To secure commercial
sustainability for the long term
3. To establish a business that can
ultimately fund investments and
the social purpose from profits
rather than subsidy.
In summary, our strategy is to secure our position as the UK’s number one
parcels and letters retailer, grow in financial services and protect our network
and social purpose — all supported by a much leaner central organisation.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
1. EBITDAS in P7 was £(1.1)m, £1.4m favourable to budget. EBITDAS YTD
was £(14.3)m,£1.6m favourable to budget. However, gross income in P7
was £0.3m adverse to budget reflecting challenging trading conditions.
2. Discussions with Government on our funding proposals continue and we are
seeking ministerial engagement.
3. We are also continuing to discuss the current dispute with our trade unions.
However, it is unlikely that we will be able to resolve the dispute with the
CWU in particular in the near future. We are planning for further industrial
action before Christmas.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
Confidential
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The Report
Looking Back
¢ Financial Performance - P7
— P7 EBITDAS was £(1.1)m; £1.4m favourable to budget. YTD EBITDAS was
£(14.3)m; £1.6m favourable to budget.
— Income in P7 from Mails and Financial Services was £0.5m and £0.8m
favourable to budget respectively.
— Expenditure in P7 of £(82.1)m was £0.5m favourable to budget. YTD
expenditure of £(531.8)m was £4.8m favourable to budget.
¢ Customer Measures
— All of our customer measures performed at or ahead of target in P7.
Specifically:
o Effort scores continued to perform well achieving 75%, in line with YTD
performance and 7pp ahead of target.
o NPS was +66, in line with YTD performance and 1 point ahead of target.
Customer Satisfaction was 84%, in line with YTD performance and target.
o Wait Time Acceptability was 93%, 1pp ahead of YTD performance and 4pp
ahead of target.
o FS NPS was +30, 1 point ahead of YTD performance and ahead of target
(+28).
e Supply Chain
— Phase 1 of the implementation of Project Iris progressively covering 10 sites
went live on 24 October.
— The project is on track and on budget with routes and duties agreed;
equipment and vehicles in place; 291 Settlement Agreements signed (15
pending); and work underway on exiting sites due for closure.
— Service performance against revised routes is monitored daily and all depots
are performing well, achieving standards in excess of 90% consistently with
some achieving 100% from the outset.
— Phase 2 covering a further 14 sites will go live on 30th January 2017.
e Industrial Relations
— As previously reported, our contingency plans for the day of industrial action
on 31 October worked well.
— Turnout was again much lower than historical turnout in previous strikes by
either Union (22% of represented employees).
Confidential
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— 99% of the Post Office network was open for business. We opened 218 out of
299 Directly Managed Branches (up from 187 on 15 September) and all our
supply chain depots bar one (Glasgow CVIT) were open.
Media coverage was very low key.
All industrial action is regrettable and we are conscious that changes we are
implementing are difficult for affected colleagues. However, we believe the
rationale for change is understood and that our regular, direct communication
with colleagues is having a positive impact.
4d
e Charity Ball
— The 2016 Post Office Charity Ball took place on 3 November. Over 1,000
people attended including suppliers, partners, Post Office heroes, POAC
members and colleagues.
— We are awaiting the final total but we know that over £140,000 was raised for
BBC Children in Need.
« Financial Performance - P7
— Gross Income in P7 of £88.0m was £0.3m adverse to budget. Gross income
YTD of £560.1m was £7.5m adverse to budget.
— Some long term negative trends continued through P7, including Lottery
which was £1.0m adverse to budget.
e Power Outage (Chesterfield)
— Our office in Chesterfield - Future Walk - experienced a significant power
failure on Tuesday 8th November and was forced to run on emergency back-
up for over 24 hours; including some loss of service in our contact centres
while the issues were addressed.
— Our operational response was good and a repair to key components of the
electricity supply to the building (including the 11,000 volt transformer) was
completed on 11 November. An assessment of whether a full replacement is
required is being undertaken.
— Nonetheless, we are conducting a review of our response and how we could
improve in areas including communication to other parts of the business.
Looking Ahead
: ITIES?
e Funding
— Discussions with UKGI on our funding proposal are continuing.
Confidential
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— An outline timetable for official level discussions has been agreed for the
various stages of the process including conversations with the European
Commission; and discussions with KPMG (covering e.g. the baseline proposition
and strategy overlays) commenced this week and are expected to go on for a
fortnight.
— In addition, I have written to Margot James seeking an early meeting to discuss
our proposals. I will keep the Board informed of progress.
e Christmas Marketing Campaign
— The marketing team have developed an innovative digital marketing campaign
which has been rolled out and will continue through the Christmas peak.
— Ihave invited them to share this with you at the Board meeting.
¢ Parliamentary Activity
-» There is a debate on 17 November in Westminster Hall on the future of the Post
Office. Margot James will be responding for the Government.
— Although the debate is inspired by the CWU, we have been working with the
team in UKGI to turn it into an opportunity to highlight the progress the
business has made since separation; our importance to communities across the
country; and raise awareness of our future strategy.
— In addition, we are planning to hold a drop-in session for MPs in Parliament on
30 November focussed on raising awareness and support for our strategy and
the banking framework in particular.
« Network Consultation
— BEIS launched its ‘Network Consultation’ on 8 November with a request for
responses by 21 December.
—» The consultation is designed to assist the Government to ‘understand
consumers’ and businesses’ expectations for what the network should look like’
in order to inform its work on the ‘future funding of the Post Office network’.
Undertaking this exercise now will also assist in ensuring clearance of EU State
Aid requirements for any future funding.
— The consultation exercise asks whether respondees agree that the current
network access criteria should be generally retained; seeks views on provision
in remote communities; and asks about future service offers together with the
role that communities can play in the Post Office network.
— At the same time, BEIS also published a report from YouGov and London
Economics on ‘The Social Value of the Post Office Network’. This academic
study (based on a 5000 responses from households and 750 from SME’s)
confirms the significant and ongoing social value that these groups ascribe to
the network and its services (the lowest of three valuations calculated yields a
figure over £4bn per year).
Confidential
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e Industrial Relations
—> Although the business managed the last day of industrial action well, there is
little sign that we will be able to resolve the dispute with the CWU in the near
future. We are anticipating further industrial action before Christmas.
— Nonetheless, we continue to have discussions with both Terry Pullinger and
Andy Furey in an attempt to find a way through the current impasse.
— I have also written to Terry Pullinger to invite him and other CWU
representatives to come to the GE meeting on 22 December to talk about our
strategy and vision; and for them to share their vision for the future of the
business. We await a response.
— More positively, discussions with Brian Scott (Unite) suggest that there may
be scope to resolve the dispute with them. They have presented us with a
broad range of requests that would allow them to settle the dispute. Whilst
we could not agree to them all, there does appear to be scope for negotiation
and compromise without diverting from our strategy. I will keep the Board
informed of progress.
° POca
—> Further to the update in last month’s report, we have continued to investigate
the options for addressing TSB’s withdrawal from the procurement process.
> As part of our working through the detail of the proposed e-money solution
HPE’s banking partner, TrustPay Global (TPG) has recently presented their
solution to the FCA, who have objected to a number of aspects of the
solution.
— They were particularly concerned about the classification of the accounts as
‘payment accounts’. Reclassifying the accounts would require £40m in capital
adequacy to be set aside. HPE are considering other aspects of the FCA’s
response and are due to come back to us shortly with a re-assessment of the
feasibility of the e-money solution.
> It now seems most likely that we will need to contract with JPM to provide the
service to be co-terminus with our contract with DWP. JPM are contractually
obliged to continue to deliver the service and will be under pressure from the
regulator to continue to provide the service to customers.
> JPM are able to update their prices if we extend. They have agreed to provide
us with detailed pricing for this option in December. We have shared the new
services contract with them, as both parties have agreed that it would be
preferable to update the terms under which the service is delivered. It is likely
that negotiations will continue into the New Year.
Confidential
POST OFFICE
In Conclusion
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The business remains ahead of target for
_ the year. However, trading conditions are
challenging and we will need to carry the
momentum from P7 into the Christmas
Peak.
The business responded well to the latest
_ day of industrial action and support
amongst colleagues was relatively low.
However, resolution with the CWU
appears no closer. More positively,
discussions with Unite suggest that there
may be scope to resolve the dispute with
them.
Confidential
Significant challenges lie ahead in
achieving our financial targets especially
given the impact of external factors on
our income projections.
We will also continue to face challenges
in managing our industrial relations.
However, our approach of engaging
colleagues directly and supporting them
through change is working. We will
continue to invest time and resource on
engagement activities.
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October 2016
Financial Performance
Al Cameron
24 November 2016
©
Post Office” Post Office Limited — Commercial in Confidence
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P7 and YTD Performance ahead of Budget
Context
. P6 EBITDAS £(2.0)m off budget (YTD £0.2m ahead) highlighting a difficult income trend.
. Forecasting £(10)m EBITDAS for full year
. P6 £235m additional cash in Network, balance sheet headroom £36m.
Questions
. How is our scorecard performance in P7 and YTD?
. What is the financial performance of the business in P7 and YTD?
. Are we forecasting year-end outturn to be on budget?
. Are we appropriately funded?
Conclusions
. EBITDAS was £1.4m ahead of budget in P7 (YTD £1.6m).
. Of this £0.7m was underlying performance, £0.5m was due to one offs mainly Telco and the remaining £0.2m was
related timing.
. We are forecasting to meet our £(10)m) full year EBITDAS target before discontinued operations, subject to
Christmas trading.
. Balance sheet headroom improved in P7 by £107m to £143m, returning half of the contingent cash from the network.
Input Sought
The Board is asked to note the financial performance.
(2)
ar
Post Office” Post Office Limited — Commercial in Confidence
The Executive Scorecard is largely positive notwithstanding
pressures on income, footfall and attendance
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. P7 YTD Full Year I 3015-16
Key Performance Indicators Act Target Var. Act Target Var. Target I Audited
Growth
‘Total Gross Income (excl NSP) £m 88.0 88.3 560.1 567.6 984.0 981.1
EBITDAS £m (100% bonus) (4) (2.5) (14.3) (16.0) (10.0) I (24.0)
Headroom £m (vs Board minimum limit)~ 343 200 343 200 200 485
Digital Net Income £m (digital team) 3.3 3.6 QR 23.0 22.4 39.9 21.8
Customer
Customer Effort 75% 68% 75% 68% 68% 67%
Net Promoter score 66 65 66 65 65 63
Acceptable Wait Time % 93% 89% 92% 89% 89% 79%
Branch Compliance - Financial Services - basket of 11 measures 20 <=50 21 <=50 <=50 26
Footfall (weekly) m (customer sessions from Horizon) 10.60 11.06 oe 10.52 10.92 11.14 11.14
People
Line Manager Engagement Index % (Once a year March) * YTD Score 68% 68% - 68% 68%
Internal senior manager appointments (3A and above) 63% 50% 38% 50% i I 50% 14%
Representation (Senior Managers) - Gender 35% 37% 35% 37% 37% 35%
Attendance 95.9% 96.7% 96.6% 96.7% 96.7% 96.8%
Modernisation
Number of branches (one month in arrears) Same as YTD 11,645 11,500 >=11,500} 11,643
NT Branches Transformed In Year (Bonus Gateway 900) 135 77 848 777 1,075 1,904
~ Actuals include £200m retained for prudence.
* Measured annually in March with a ‘Pulse survey’ due in September.
Attendance — in period impact across Supply Chain and Crowns
(3)
Post Office Limited ~ Commercial in Confidence
P7 showed an improved performance £1.4m ahead of budget
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£m
Gross Income
Cost of Sales
NET INCOME
Expenditure
FRES - Share of profits
EBITDAS
P7
Period Variance YTD
Actual to Budget Actual
88.0 (0.3) 560.1
(10.2) 1.1 (66.4)
77.8 0.8 493.8
(82.1) 0.5 (531.8)
3.2 0.1 23.7
(1.1) 1.4 (14.3)
Versus prior year, EBITDAS was £1.6m ahead (YTD £11.5m),
YTD
Variance
to Budget
(7.5)
4.6
(2.9)
4.8
(0.3)
1.6
This includes no change of accounting for discontinued operations (slide 7).
Of the period net £1.4m:
+ £0.5m one off, mainly Fujitsu cost of sales rebate,
+ £0.2m is net timing (favourable non staff and agents pay offset by averse staff cost), and
+ £0.7m was therefore period performance and relates to lower agents pay and cost of sales.
Full Year
Budget
984.0
(120.0)
864.0
(909.8)
35.8
(10.0)
Post Office”
Post Office Limited ~ Commercial in Confidence
©
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Favourable trading in Mails and Financial Services offset by
weaker Lottery and Supply Chain.
P7 YTD Full Year
Period Variance YTD Variance Budget
Gross Income (£m) Actual to Budget Actual to Budget
Mails 31.0 0.5 189.9 1.7 329.6
Retail & Lottery 4.1 (1.0) 24.5 (4.0) 49,2
Financial Services 27.0 0.8 177.1 (2.7) 313.9
Government Services 9.6 (0.3) 70.2 2.7 116.0
Telecoms 13.5 0.2 78.8 (4.7) 141.1
Supply Chain 2.3 (0.8) 16.5 (1.2) 29.8
Other 0.6 0.2 a2 0.6 4.3
Total Gross Income 88.0 (0.3) 560.1 (7.5) 984.0
Cost of Sales (10.2) 1 (66.4) 4.6 (120.0)
Net Income 77.8 0.8 493.8 (2.9) 864.0
* YTD performance continued to be strong in Mails, weak in Retail & Lottery.
. Financial Services had a stronger performance in Insurance and Savings, close to budget on an
underlying basis and supported by £0.9m of phasing benefits in banking and payments.
. Telco after one-off cost of sales saving, arising from Fujitsu rebate.
. Discontinued Supply Chain income starting to show the (unbudgeted) impact of Iris.
”)
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Cost favourable overall with headcount reduced by 605
(10%) YTD
P7 YTD Full Year
Period Variance YTD Variance
£m Actual toBudget Actual to Budget Budget
Staff Costs (20.5) (0.9) (135.7) 0.6 (226.4)
Agents Pay (35.3) 0.8 (227.0) 1.2 (391.1)
Non- Staff Costs (26.3) 0.6 (169.1) 3.0 (292.3)
Total Expenditure (82.1) 0.5 (531.8) 4.8 (909.8)
. Staff Cost increases are driven by phasing and the YTD figure remains favourable.
. Agents Pay savings reflect lower income through the network, with lottery shortfalls having a
particular impact and some phasing.
. Non staff Costs — underlying £1.2m favourable, some phasing benefits from Christmas marketing,
offset by additional provisions on losses and HMRC AML issue of £2m.
. Headcount of 6,000 is 257 lower than P6 and 605 lower that the start of the financial year.
©
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Against forecast we had a good month with favourable phasing
P7 YTD Full Year
£m Period Variance YTD Variance Q2
Actual toF'cast Actual to F'cast Forecast
Gross Income 88.0 2.5 560.1 0.6 964.5
Cost of Sales (10.2) 0.8 (66.4) 1.2 (117.5)
NET INCOME 77.8 3.4 493.8 1.8 846.9
Expenditure (82.1) (0.3) (531.8) 2.2 (892.3)
FRES - Share of profits 3.2 0.1 23.7 (0.3) 35.4
EBITDAS (1.1) 3.2 (14.3) 3.7 (10.0)
Discountinued adjustment
(Subject to E&Y) 1.1 1.1 7.9 7.5 12.9
Potential EBITDAS 0.0 4.4 (6.8) 11.2 2.9
. Of the £3.2m, £2.0m was trading largely in Government Services, £0.9m was phasing in Financial
Services and £0.5m is one time Fujitsu credits in Telco, offset by £(0.3)m in net expenditure. Overall
£1.7m trading benefit in the period.
. We are on target to meet £(10.m) EBITDAS subject to Christmas trading in particular.
. A detailed technical paper has been provided to E&Y to assess the accounting treatment for Iris.
S)
Post Office” Post Office Limited — Commercial in Confidence
We continue to underspend on CAPEX and exceptionals
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P7 YTD Full Year
£m Period Variance YTD Variance Q2
Actual toBudget Actual to Budget Forecast
EBITDAS (1.1) 1.4 (14.3) 1.6 (10.0)
Depreciation (0.0) 0.1 (0.3) 0.3 (0.8)
Network Payment 7.7 (0.0) 47.7 0.0 80.0
EBIT pre exceptionals items 6.6 1.5 33.1 1.9 69.2
Interest 0.4 (0.0) 0.9 (1.4) 3.8
Discontinued Operations 0.0 0.0 0.0 0.0 0.0
Impairment (7.8) 6.7 (56.0) 51.3 (180.0)
Exceptionals (incl BT & VR) (12.8) 7.7 (85.3) 20.0 (173.0)
Government Grant Utilisation 11.7 0.0 81.7 0.0 140.0
Profit/(Loss) On Asset Sale 0.0 0.0 L7 1.7 0.0
Total Profit/(Loss) Before Tax (2.0) 15.9 (23.8) 73.6 (139.9)
. interest costs YTD have increased reflecting the increased levels of network cash.
. We are underspending in period and YTD due to the timing of programme delivery.
Post Office” Post Office Limited — Commercial in Confidence
©
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Network cash has reduced by £121m from P6 but remains
£185m higher than year end
Balance Sheet
March
£m Oct 2016 2016 Variance I The P7 Balance Sheet variances to March 2016 year end are:
pxed assets 334 4u8 (136) * Debtor variance of £126m comprises decreases of £62m
Cash 850 712 138 in the card account and ATM client debtors.
Creditors (648) (684) 36 ; ,
Pension (deficit)/surplus 195 196 (1) + Network cash has increased by £185m since March 2016
Provisions (162) (167) 5 but reduced from £959m in P6 to £838m in P7, £121m
Other 7 7 (e) of contingency funding has been returned, leaving
Loan (607) (465) (142) c.£110m of contingency and c.£4m seasonal supply in
Net Assets 73 138 (65) the Network.
[Capital and Reserves [I _73 138 (65) I . Creditor balances have decreased by £36m, client
Network Cash creditors decreasing by £70m and business creditors
March , increased by £34m.
£m Sept 2016 I Oct 2016 2016 Variance
Retail, Cash Centres 783 689 534 155 * While the agents’ compensation liability has reduced by
Bureau 123 105 74 31 payments made, there are new provisions in relation to
Cheques, debit cards 53 45 45 (0) the discontinuing of the external Supply Chain business.
Network Cash 959 838 653 185
Cash not in Network 20 12 59 (47) * The loan balance movement is consistent with the cash
Total Cash 979 850 712 138 flow in month, net of bank deposits.
Balance Sheet Headroom
March
~— Sept 2016 I Oct 2016 I _2016 + Balance Sheet Headroom has reduced from March 2016
Loan city 3 8 2 due to the Loan balance increasing to fund the
Loan drawndown a (607) 88) comparatively higher Network cash, Balance sheet
Headroom _ Headroom has improved £107m since P6 from cash
Target minimum 200 200 200 returned from the network.
Headroom above target 36 143 285
(9)
ard
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Ee
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P7 Cash outflow of £(188)m and Net Debt of £595m driven
by higher Network Cash
Cashflow Oct 2016 cash outflow of £(188)m for P7 is £(104)m adverse to budget
Em Actual Budget Variance I arch :
EBIT after discontinued pr 31 10 (10) + Network cash is £(114)m adverse entirely due to retained
operations sj
Working Cantal an ie an 5 contingency prefunding the network.
Client Balances 1 23 (22) 21 .
Network Cash (185) (71) (114) (32) + Client balances are £(22)m adverse to budget due to a number
Capital Expenditure (56) (107) 51 (180) of smaller variances across our client portfolio the largest of
Government funding 172 172 ° 220 which were Santander, UKPA and Bank of Ireland.
Exceptional Items (140) (164) 24 (268)
Other (including interest and tax) (11) 15 (26) 6 . a
Operating Cashflow (asa) 785) (104) (238) + The £35m FRES Joint Venture dividend was budgeted for P7
but was actually received on 31 October which falls into P8.
This adverse variance is in other items.
» These adverse movements were partially offset by capex which
Net Debs audited is £51m favourable and exceptionals £24m as spending plans
* Debt Match track behind budget.
£m Oct 2016 2016
Net increase/(decrease) in cash and cash equivalents 138 (409)
‘Add/(deduct) movement in cash in the network (185) 55
Deduct proceeds of borrowing from BIS. (142) (155) . .
Net increase in net debt (189) (209) Increase in cash and cash equivalents of £138m equates to the
Net debt brought forward at the beginning of the year (406) (197) ‘
Total net debt carried forward at the end of the period (595) (406) balance sheet variance on Page 9.
Net debt consists of: Net debt of £595m is £189m higher than the start of the year,
BIS oan (607) (465) largely driven by funding higher network cash.
Cash (excluding cash in the Post Office network) 12 59
Total net debt carried forward at the end of the period (595) (406)
(40)
©)
Post Office Limited ~ Commercial in Confidence
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POST OFFICE PAGE 1 OF 1
BOARD NOTING PAPER
Board Effectiveness Review (BER)
Author: Alwen Lyons Sponsor: Ken McCall Meeting date: 24 Novernber 2:
Executive Summary
Context
In last year's Annual Report and Accounts, a commitment was made to carry out an
external BER in the financial year 2016/17. This was discussed at the Board and
delegated to the Nomination Committee to deliver.
The work has been procured from Lintstock Ltd., a company recommended by Ken
McCall, Senior Independent Director, and will take place between the November 2016
and January 2017 Board meetings.
Lintstock Ltd., will use an online questionnaire to produce both a quantitative and
qualitative review, which will be available for the January 2017 Board meeting. Each
Board member will receive a customised questionnaire, depending on their Committee
membership and Lintstock will be available to take verbal input if anyone requires.
The questionnaires will be circulated at the end of November 2016, with full
instructions on how to complete.
The questionnaire relevant to the Board is included after this paper for your
information.
The Group Executive will also be asked to complete their own questionnaires, which
will be included in the review.
Input Sought Input Received
The Board members are asked to note the The Chairs of the Board, ARC,
Board Effectiveness Review in which they Nominations and Remuneration
will be asked to participate in December Committees have all signed off the
2017. questions for respective sections of the
review.
Strictly Cor
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Post Office I Board Review 2016 Page 1
Board Review 2016: Overview
Board Composition
Q1___ How appropriate is the Board's composition?
Please comment if you feel there are any additional skills which ought to be added to the
Board.
Excellent - Good - Adequate - Poor
Q2_ Please describe the key changes that ought to be made to the profile of the Board over the
next 3 years to match the company's strategic goals.
Free Text Question
Board Expertise
Q3 How well does the Board understand the views and requirements of the following key
stakeholders?
Please comment if you feel the Board's understanding of one or more stakeholder group(s)
ought to develop further.
Multiple numeric scale: rate each of the following from 1 ("Very Poor’) to 5 (Very Good’):-
- The Government
- Customers
- Employees
- Sub Postmasters
Q4 How would you rate the Board's understanding of the company’s product pillars?
Please identify any specific areas in which you feel the Board's understanding ought to
develop further.
Multiple numeric scale: rate each of the following from 1 ("Very Poor’) to 5 (‘Very Good’):-
- Mails and Retail
- Personal Financial Services
- Payments
- Government Services
- Telephony
- FRES
- POMS
GS untstock Lip © November 2016
18
Post Office I Board Review 2016
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Board Dynamics
Qs
Q6
Q7
On a scale of 1 to 5 (where 3 is ‘appropriate’) how would you rate the level of involvement of
Non-Executives in the affairs of the company outside Board meetings?
Please comment if you do not feel the balance of Non-Executive involvement is appropriate,
or if you have any suggestions for improving the engagement of the Non-Executives.
Too Little Involvement <— 1 - 2- 3-4 - 5 Too Much Involvement
How would you rate the quality of the relationships between individual Board members?
Excellent - Good - Adequate - Poor
How would you rate the Non-Executive Directors' engagement with management in:
Multiple numeric scale: rate each of the following from 1 (‘Very Poor’) to 5 (‘Very Good’):
- Providing effective support
- Providing effective challenge
QB
How would you rate the quality of the relationship between the Board and the Post Office
Advisory Council?
Please comment if you have any suggestions for improving the relationship or
communication between the Board and the Post Office Advisory Council.
Excellent - Good - Adequate - Poor
How, if at all, could the atmosphere in the boardroom further encourage equal contribution,
candid discussion and critical thinking?
Free Text Question
Time Management
Qi0
Qi
Q12
Qi3
Q14
How would you rate the planning of the annual cycle of work of the Board?
Please comment if you do not feel that all important issues are covered during the year.
Excellent - Good - Adequate - Poor
How would you rate the Board's agenda?
Please comment if you don't think that it covers the key issues and/or that the items are not
well prioritised.
Excellent - Good - Adequate - Poor
How well does the Board review the effectiveness of past decisions and capture any lessons
or actions required?
Excellent - Good - Adequate - Poor
What, if anything, do you feel the Board spends too much time focusing on?
Free Text Question
What, if anything, do you feel the Board spends too little time focusing on?
Free Text Question
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Board Support
Q15 How would you rate the frequency of presentations made to the Board by management?
Too Few<-1-2-3-4-5-» Too Many
Q16 How would you judge the quality of the presentations made by management to the Board?
Please comment if you have any feedback for those presenting at meetings.
Excellent - Good - Adequate - Poor
Q17 How would you rate the following aspects of the Board packs?
Multiple numeric scale: rate each of the following from 1 (‘Inappropriate’) to 5 (‘Appropriate’):~
- Length
- Use of Summaries
- Structure
- Timeliness
Q18 Please detail any recommendations for improving the content and format of the various
management reports contained in the Board packs.
Free Text Question
Board Committees
Q19 How would you rate the performance of the Committees of the Board?
Please comment if you feel that the performance or reporting of one or more Committee(s)
ought to improve.
Multiple numeric scale: rate each of the following from 1 (‘Very Poor’) to 5 (‘Very Good’):
-ARC
-NOMCO
- REMCO
- POAC
Strategic Oversight
Case Study: June Strategy Day
Q20 How would you rate the agenda for the strategy day?
Please comment if you don't think that it covered the key issues and/or that the items were
not well prioritised.
Excellent - Good - Adequate - Poor
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Q21 How would you judge the quality of the presentations made to the Board during the strategy
day?
Please detail any recommendations you may have with respect to the quality of the
presentations, or the balance between presentation and discussion during the strategy day.
Excellent - Good - Adequate - Poor
Q22 How would you rate the clarity and articulation of the conclusions reached during the
strategy day?
Excellent - Good - Adequate - Poor
Q23 What would be your top 3 priorities for improving the Board's next strategy day?
Free Text Question
Wider Strategic Oversight
Q24 Ona scale of 1 to 5 (where 3 is ‘appropriate’) how would you rate the involvement of the
Board in determining the strategic direction of the company?
Please comment if you do not feel the Board's involvement in determining the strategic
direction is appropriate, or if you have suggestions for improving engagement in this area.
Not Involved Enough <- 1 - 2- 3-4 - 5» Too Involved
Q25 How effective has the Board been in testing and developing the company's strategy?
Excellent - Good - Adequate - Poor
Q26 In what specific ways do you feel the Board could contribute further to testing and
developing the company's strategy?
Free Text Question
Q27 How good is the Board's understanding of the company's performance relative to its main
competitors in the following areas?
Multiple numeric scale: rate each of the following from 1 (‘Very Poor) to 5 (‘Very Good’):-
- Mails & retail
- Financial Services
- Telephony
- Government Services
Q28 What do you feel are the top 3 strategic issues facing the company over the next 3 years?
Free Text Question
Risk Management and Internal Control
Q29 How would you rate the Board's focus on risk?
Please comment if you have any suggestions for improving the Board's focus on risk or the
structure of risk discussions at meetings.
Too Granular <- 1 - 2-3-4 -5-» Too High Level
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Q30 How would you rate the level of detail provided on risk and reward in papers submitted to the
Board?
Too Little Detail — 1 - 2-3 - 4-5 Too Much Detail
Q31 How good is the Board at considering risk when making strategic and operational decisions?
Excellent - Good - Adequate - Poor
Q32 How can the Board improve its performance in risk management / oversight?
Free Text Question
Succession Planning and Human Resource Management
Q33 How would you rate the appropriateness of the structure of the company at Group Executive
level?
Excellent - Good - Adequate - Poor
Q34 Are there any key positions which you think the company lacks or ought to be strengthened?
Free Text Question
Q35 How effective is the Board's oversight of succession plans for the following members of
management?
Please comment if you have any observations relating to the development or succession
plans for management, or suggestions for improving the role of the Board in this area.
Multiple numeric scale: rate each of the following from 1 (‘Inappropriate’) to 5 (‘Appropriate’):-
- The Chief Executive
- The Chief Financial Officer
- The Group Executive
Priorities for Change
Q36 If there was one practice you could bring to the Post Office Board from another Board upon
which you serve, or have served, what would it be?
Free Text Question
Q37 In terms of improving the Board's performance, what would be your top 3 priorities for the
coming year?
Free Text Question
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DECISION PAPER
POST OFFICE BOARD
Mails strategy update
Author: Mark Siviter Sponsor: Martin George Meeting date: 24" November 2016
Executive Summary
Context
The crucial exclusivity provisions which underpin our MDA contract with Royal Mail (RM)
expire in Q4 of FY19/20. This is earlier than the horizon of our five year strategic and
financial plan, which we are setting out to Government together with its associated
funding request. Uncertainty around the cost of securing our long-term sustainability in
Mails is the biggest swing factor in the business’ five year profit projections. It is essential
to secure a sustainable long-term model for our Mails business well before the exclusivity
provisions with RM expire but our optionality reduces and our negotiating position
weakens the later we renegotiate.
In June, the GE and Board endorsed our strategy for securing our long-term future with
RM. We set out the plan to engage RM in a joint strategy project this financial year to
reinforce to them why we are better together and why we must act to renew the
relationship for the long-term. Our intent remains to drive a renegotiation with RM next
financial year. In June we also set out how we would develop a business plan for our next
best alternative, as leverage and contingency, and deliver “no regret” moves within the
bounds of the MDA to improve our position.
Questions addressed in this report
1. How have we progressed with Royal Mail since we set out our approach at June’s
Board meeting? What have we learned and how does that impact our plan?
2. What have we done since June regarding development of our next best alternative?
What have we learned and how will this influence our strategy towards Royal Mail?
3. How are we improving the chances of our desired outcomes with Royal Mail? What is
our timeline, when are the key decision points, and what are our next steps?
Conclusions
1. Our Mails business is currently trading ahead of budget and Royal Mail have been
actively engaged with us in a joint strategy project since September. This is the first
collective review of our joint strategy in the Mails market since 2012. It has so far
established a common baseline and by the end of this financial year it will establish a
joint, market-relevant, vision of the future together. This is positive but
simultaneously, and of concern, RM are not committing to renegotiate early on a deal
extending beyond 2022, and have tried to limit focus of any changes in the
relationship to the “second half” of the current MDA term. Our chances of securing an
acceptable long-term (i.e. post-2022) relationship before our self-imposed deadline of
March 2018 are currently low. We lose optionality for implementation of acceptable
alternatives the later we conclude a deal with RM. We are therefore doing everything
we can to increase chances of striking a deal next financial year. This will involve
exploiting the contractual right we have under the MDA to engage RM in a “mid-term
review” of the agreement, commencing in May 2017.
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2. We have assessed in much more detail the two “next best alternative” business models
we set out in June. We are now more confident that there is a viable alternative model
for our Mails business, our customers and our postmasters, without such a close
dependency on RM. This will increase the leverage we need and provide contingency.
We are on a critical path to being able to implement this and we anticipate a major go/
no-go decision in November 2017. A “go” decision would have profound ramifications
for both us and RM and so we must exhaust all opportunities with RM before then.
3. We must use the rest of this financial year to: complete a compelling joint strategy
with RM; keep delivering on “no regret” moves which strengthen our position within
the boundaries or silent areas of the existing MDA; further develop our next best
alternative; gather further intelligence on RM’s likely asks in return for a longer term
deal; and model a fully costed negotiating mandate. Our overall timeline remains
unchanged. The next decision point is the March 2017 Board where we will provide a
full progress update on all elements of our strategy, and this is when we expect to
formally recommend a negotiating mandate. Approval of this mandate will involve
choices on the extent of concessions we could be prepared to trade in order to ensure
the long-term security of our Mails business. The position with RM reinforces the
importance of the strategic priorities as set out in the five-year plan to FY20/21 and
the associated funding request. These priorities ensure we keep reducing the costs and
complexity of Post Office Ltd whilst enhancing our distributional capabilities and
strengthening profitable non-Mails income streams.
Input Sought Input Received
Does the Board endorse our GE & Board endorsement of our strategy (June
approach and the next steps as 2016). Ongoing supervision thereafter from the Mails
set out in this paper? Strategy Steering Committee and the GE.
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The Report
How have we progressed with Royal Mail since we set out our approach at June’s
Board meeting? What have we learned and how does that impact our plan?
1. At the end of H1, our Mails net income is trading £1.3 million ahead of budget and on
track to hit a full year reforecast of £332.6m (versus budget of £329.6m). On a like-
for-like basis that outturn will represent a trading income decline of c-1.6% year-on-
year, which is just ahead of the combined Post Office and Royal Mail view that the
domestic and export mails market is in a slow decline at approximately -2% CAGR.
2. Since June’s Board meeting, we have launched the Drop & Go proposition online to
defend small business market share. A MDA Variation agreement has also been signed
with RM. This has delivered us access to discounted pricing for our Drop & Go
proposition; additional protections for Post Office from RM switching volume to their
online channel; and a mutually-agreed rollout of parcels barcoding.
3. Royal Mail have engaged in joint strategy development and since June we have
baselined the scope, plan and governance of this project and fully mobilised it. This is
a crucial mechanism for us to establish a new cross-organisation vision, a competitive
value proposition and a proposed operating model that is sustainable and relevant in
the market. From our perspective, we also see this work as an important mechanism
for Royal Mail to internally prove the case for our “better together” stance, to influence
them away from their own next best alternatives, and to act as a precursor to a
meaningful renegotiation of our long-term future. It also allows us to understand RM‘s
likely negotiating position, and for us to set out a “burning platform” and why awaiting
the MDA-mandated 2019/20 full renegotiation window is too late for either party.
4. This work has got us to an agreement on: a mutually-validated baseline of the market,
the competition, and other relevant external factors; a common set of customer
definitions; and a common view of our combined Mails business’ strengths,
weaknesses, opportunities and threats. Royal Mail are taking the work seriously. They
have committed resource and are attending at least twice-weekly workshop sessions.
They have also appointed their Strategy Director and Chief Customer Officer to the
project's steering committee. The project commenced in September, two months later
than we had wished. It took time for Royal Mail to resource up and for us to negotiate
the full breadth of the scope we desired and baseline a plan with the right level of buy-
in across both organisations. The project is now progressing well and will formally
complete in April 2017, however we anticipate that our most relevant findings will be
available in advance of our March 2017 GE and Board meetings. An executive
summary of the outputs to date is available in Appendix 1. Further detail is available
upon request.
5. We have also been working with Royal Mail to study lessons we can learn from other
winning organisations in the postal and logistics sectors. For example the US Postal
Service’s mobile proposition which allows customers to transact in advance either for
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scanning into self-service kiosks in branch or to shorten the time required at a branch
counter. We have also considered successful but unrelated retailers where physical
attendance in branch remains a fundamental part of the purchasing journey. For
example, 21% of Starbucks purchases in the U.S. are now made via their loyalty
programme app. This has attained over 11 million users, with high levels of customer
intimacy generated from low value purchases, and it crucially offers footfall growth and
queue reduction for the franchisees of Starbucks’ branches.
. Our view is that the MDA contract form and the behaviours it drives have made it
difficult to enable innovation in the product set, customer journeys, business
simplification or interdependent cost reductions on either side during the “first half” of
the MDA (2012-16). The relatively benign market environment which allowed this no
longer exists. The MDA has a provision for a “mid-term review” to commence in May
2017. This contractual opportunity falls almost immediately subsequent to completion
of the joint strategy project. It is our intent to use this provision to its fullest extent.
The provision requires both organisations to meet in good faith, review the agreement
and its operation, and enter into discussions with a view to agreeing amendments to
the MDA and to take into account changes in market dynamics. Discussions have now
commenced with RM on how we set the scope, boundaries, duration, and people
involved for this mid-term review process. We are also taking detailed legal advice to
prepare for this process.
Royal Mail have indicated their preference to use the outputs of the joint strategy work
solely as a precursor to setting the scope and terms of the “second half” of the MDA
(2017-22). So far, Royal Mail do not recognise a need to open negotiations early about
any relationship beyond their own strategic planning timeframe (2022), and have
positively declined the option to do so. Although not confirmed, we expect they could
be considering a short term extension on exclusivity arrangements (e.g. to 2022 rather
than 2020), but with price conditions. Whilst we agree there is ample opportunity to
facilitate a better “second half” of the MDA, such a short and conditional extension
would fall well short of our desired outcomes. It would not provide the long term
security that we and our postmasters need.
. We have seen no indications that Royal Mail are considering or developing some of
their more radical alternative options. Our view of their alternatives remains as we set
out in June and these remain a serious risk to our success. Their alternatives include:
e Stretching the MDA to the fullest extent by shifting volume away from Post Offices
to lower cost channels. We have already learned that RM is developing a mobile
app targeted at the consumer market. This is focused on receiving rather than
sending customers but if it were to eventually enable sales as well it could
establish the start point towards further disintermediation of Post Office and a
future accept-only proposition being available from RM to other retailers. We
believe RM are also giving consideration to eBay integration which would
represent a threat to our own parcel volumes. We are also under pressure from
Royal Mail to support the introduction of delivery confirmation into more of the
product portfolio. If unchallenged, the eBay and delivery confirmation projects
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alone could cannibalise our existing revenues to the order of £16m p.a. While we
meaningfully engage with RM on the topics, we are naturally resisting change on
their desired terms.
e More overt and aggressive moves to shift volume from us. These could include
acquisition of PayPoint, or preparation to introduce doorstep sales by postmen or
more direct sales via delivery offices.
9. There are lots of reasons to believe that it is both Royal Mail’s and our interests that
the Post Office relationship is renegotiated next year. We believe Royal Mail will need
to take on an increasing risk appetite in terms of improving their domestic cost
position. Relatively stagnant domestic growth and Deutsche Post's recent acquisition of
UK Mail (September 2016) will further stress Royal Mail’s position in the highly
competitive B2C segment of the domestic market. We anticipate Royal Mail’s medium
term strategy to focus on growth via further acquisitions in overseas parcels markets;
domestic operational efficiency; and an increased focus on the domestic consumer
proposition. Post Office has the power to be either an enabler or a threat to the latter
two objectives; our goal is to establish a mutually value-accretive basis to help Royal
Mail achieve both.
10. Our initial conversations and research indicate RM’s propensity to engage in a Joint
Venture with us is likely to be low. Culturally, RM favour more transactional contracts,
even in mission-critical relationships such as running their sortation technology. When
they see strategic value in other organisations, they are increasingly making
acquisitions as a means of integrating rather than entering equity partnerships. RM do
not perceive acquisition of Post Office Ltd as a realistic or attractive proposition for
them. Our final contract format, be it transactional, more strategic, or an equity
partnership, will be a key element in negotiation. We intend to use the “operating
model” phase of the joint strategy project to help us persuade Royal Mail of additional
value which could be unlocked via an equity partnership model.
11. We will continue with our plan of seeking a mandate to negotiate from the GE and
Board in March 2017 by which point the joint future vision and value proposition will
have been developed from the strategy project. The critical success factors for any
new deal will be one that:
a) Offers the best in class proposition for our customers.
b) Supports the long-term sustainability of the network and our agent proposition.
c) Delivers profitable income over the long-term for Post Office Ltd; and
d) Adds value to our brand equity.
12.When it happens, we expect a renegotiation to be a trade across at least seven major
dimensions of the relationship as set out below:
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13.
14.
15.
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“yy
(3) Duration
Contract format and exgiration
Margin and Exclusivity
Fived, transac
(2) Market retevance of our joint customer prope
Ability to innavate together te baat the cory
Our request for a negotiating mandate will set out a costed position and our start
points, zones of potential agreement, and walk-away triggers. It will also set out our
best understanding of Royal Mail’s likely starting position, zones of potential
agreement, and walk-away triggers. We are already gathering intelligence to build this
understanding, and will continue to do so over the remainder of this financial year. An
approval of this mandate in March 2017 will involve choices on the extent of
concessions we would be prepared to trade in order to ensure the long-term security of
our Mails business.
We need to reserve our option to offer early, time-limited, financial incentives in a
partnership opportunity to Royal Mail in order to achieve our objective of an early
renegotiation on a long-term deal. We believe it would be wrong to deploy this tactic
yet, but believe it more likely than not that we will need to do so early next financial
year, once the joint strategy is completed and when it can be tied to a compelling
vision of our long term future together. Implementation of any such incentive would be
from FY18/19. The affordable level of such an incentive, its conditions (most likely
associated with cost savings), and the context of it within our wider set of deal
objectives, would be brought to the GE and Board for endorsement as part of the wider
approval process for the negotiating mandate.
In conclusion, our overall strategy towards Royal Mail has not changed from the path
we set out to the Board in June. Whilst we cannot mandate that Royal Mail enter into a
renegotiation next year regarding the post-2020 relationship, we are using the tools
we have to influence their position. Some of these are already in use and further tools
are still available to be deployed (such as external stakeholder influencing) to influence
them towards our desired outcomes.
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What have we done since June regarding our next best alternative plan? What have
we learned and how will this influence our strategy towards Royal Mail?
16. We have worked with expert advisors from the logistics market to further investigate
the two alternative business models we set out for assessment:
e Offering other providers access to our sales channel as a “mail supermarket”
e Becoming a provider of mails products in our own right, with our own product set
and contracts let for collection, sortation and delivery services.
17. We believe we could have the most credible and sustainable alternative strategy by
becoming a mails provider in our own right. Implementation would require significant
business change and would not be without risk. It could make Post Office a serious
threat to Royal Mail. Further detail is available in Appendix 2, but in summary our
growing confidence in such a model is driven by our two key conclusions that:
e There is adequate supplier capacity and capability in the UK to absorb our
volumes with a much reduced reliance on RM. In letters for example, our total
volume would represent just 10% of either of Whistl or UK Mail’s current volumes.
Both organisations process, sort, trunk and then and inject letters into RM for final
mile delivery via the regulated Downstream Access market. In parcels, the current
level of market overcapacity is increasing faster as Amazon expands its own
logistics operation and removes volume from other providers. We could expect to
have to work with more than one parcel provider to handle our market-changing
250m annual parcels volume, or we could need one to invest to accommodate
these volumes. In capacity terms, the three largest players outside Royal Mail
already handle 570m parcels p.a. (MyHermes 250m, Yodel 170m, DPD 150m).
e Our initial indicative economics, at the most conservative assumptions,
demonstrate a positive direct product contribution for Post Office of c£100m p.a.
from revenues of £1.0bn-£1.2bn. This compares favourably with the
counterfactual case of reduced RM income in a new deal and a Mails direct product
contribution nearer to £50m p.a. The business would incur new fixed costs in the
region of £25m p.a. while all other costs would be volume-variable, with agents’
pay rates maintained at current levels. These figures do not reflect upside
opportunities, for instance new product and revenue streams from the greater
freedoms we would have to directly partner with Amazon, eBay and other online
retailers. However, implementation planning and risk planning for this strategy is
at a very early stage and will require significant further development before a final
recommendation could be made.
18. We have assessed potential outcomes against the same four success factors that we
will assess any future deal with Royal Ma
Offer the best in class *® We could continue to offer a full spectrum of mails products, with
proposition for our market-leading features.
customers We could continue to price at levels competitive with Royal Mails’
rates across Letters, Large Letters and Parcels, though in some
instances with greater service quality (e.g. tracking).
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© We could take commercial control of product design and pricing,
allowing our own response to customer needs.
© We could reduce customer journey complexity and improve in-
branch experience through our own product design.
¢ However, Royal Mail could take a mutually-damaging approach
towards stamp or first class letter and large letter product
journeys. Estimates are ranged to account for this risk.
Support the long-term © Agents could have a strong mails product portfolio to retain
sustainability of the footfall, even in the face of likely competition from RM.
network and our agent * Low value, high-workload, Royal Mail accept-only volumes could
proposition reduce as Royal Mail set up alternative acceptance channels.
© Branch collections could continue to be made by a single (prime)
provider, with equivalent or fewer segregation requirements.
© Overall complexity could reduce and agents could gain greater
ability to influence the products for their customers’ needs.
Total agents pay could be maintained at current levels should we
choose to, despite reduced overall volume and complexity.
© Transitioning to the new arrangements would be highly challenging
however, requiring new processes, training and ways of working.
Deliver profitable © We anticipate indicative Post Office Mails revenue of £1.0-£1.2bn
income over the long- and a direct product contribution of c£100m p.a. after taking into
term for Post Office Ltd account an initial assessment of the downside risks from Royal
Mail’s response. This is the biggest single uncertainty.
© The Royal Mail response would be powerful, and we could
anticipate them to take overt and aggressive actions to defend
their position (e.g. poaching agents, acquiring PayPoint).
e There are also further upside opportunities which remain to be
assessed including accessing more SME customers and through
working with Amazon or eBay on new propositions.
Add value to our brand © We could continue to operate as the trusted postal retailer on the
high street.
@ We could have more control over the relationship of our brand with
the mails products we sell.
© However, we could be involved in an ugly, and protracted, public
relations battle with Royal Mail.
© Similarly, we could face direct competition with Royal Mail on the
high street.
19. If we wanted to be in a position to deploy such a model in time for a FY20/21 rollout,
we would need to have commenced a process of public procurement with logistics
providers by January 2018. This is after the joint strategy project and MDA mid-term
review window. Moving into a procurement could only ever be considered after having
exhausted all other attempts to secure an acceptable long-term deal with RM.
20.Running such a procurement process is not without legal challenges under the terms of
the existing MDA and we are engaging expert legal advice on this point. We believe the
act of us revealing an intent to the market would cause share price damage to Royal
Mail. That would be certain to provoke an aggressive commercial and legal response.
21. We have also taken expert advice to help assess the feasibility of Post Office taking on
the Universal Service Obligation (USO) in its own right and if this could be
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23.
24.
25.
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advantageous to us in any scenario. We have concluded that Post Office is very
unlikely to become the Universal Service provider in whole or part. This is because:
e There is no opportunity for any change in Universal Service provider until 30
September 2021 and this would be subject to an OFCOM determination.
e We do not have an end to end delivery network, so would not be in a position to
persuade OFCOM beforehand of our ability to deliver the USO requirements.
e It would be financially unfavourable to us, even despite the ability to price products
with VAT exemptions.
Our other alternative- to offer access to our network to a range of providers as a “mail
supermarket”- is not ruled out as a contingency but is considered a less attractive
long-term option. We consider this more likely to be damaging for the agent value
proposition and it would be likely to reduce consistency of the customer proposition
across our network. Not all products could be available in all branches and we would
gain no commercial control over our product set. We would also be beholden to other
parties with low margins who control larger sections of the value chain. Further detail
is available in Appendix 2, where this option has also been assessed against the same
four success factors as above. Our modelling indicates this option as materially less
sustainable with an expected direct product contribution of £25m p.a. compared to the
baseline counterfactual of £50m p.a.
Desk-based modelling and external expert challenge has refined our thinking since
June and increased our confidence in the viability of the option to become a mails
provider in our own right. However, we will need to do much more work in order to
confirm its credibility, deliverability, and to develop a fully costed and mature business
case. Transitioning to such an option would be ground-breaking and challenging. We
would need a greater level of confidence in a) our view of the possible Royal Mail and
market reaction and our resulting volumes from 2020, b) supplier market appetite and
c) the implementation plan and its risks before we could recommend to the GE and
Board to enact such a plan, or even to recommend we reveal any such plans in
development as a negotiating leverage towards Royal Mail.
We also recognise that further development of this business plan could expose further
implementation challenges, or that strategic or market conditions for potential logistics
partners could affect the ability for us to secure partners at the right price. Either way,
further planning and preparation will be essential to preserve optionality and provide
contingency. There is urgency here as we are already close to the implementation
critical path, should we ever wish to implement such a plan.
In conclusion, since June we have significantly increased our understanding of our
alternatives. With further work we expect this to become a) useful leverage and a way
to increase our negotiators’ confidence with RM, b) a mechanism to set a more
demanding walkaway position in our negotiating mandate, and c) a genuine
contingency to keep the Post Office in business in the event of failing to secure an
acceptable deal with Royal Mail. We must invest in further development of this
business plan and associated implementation plan.
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How are we improving the chances of our desired outcomes with Royal Mail? What is
our timeline, when are the key decision points, and what are our next steps?
26.
27.
Our desired outcomes with RM, as set out in June, have not changed. These involve:
moving from transactional fees to greater collaboration and value sharing; an income
stream sufficient to ensure our long-term viability and that of our agents; pricing
structures that incentivise RM to maximise volumes through our network; a
relationship over the long-term, preferably perpetual; positive incentives for us to
deliver market leading service; and a product set which provides a breadth of range
and value-added features to help defend against commoditisation.
To improve our chances of achieving these outcomes with RM we must now:
a) Complete the joint strategy project between now and April 2017. This is the best
available vehicle to prove the “better together” case, establish the need to act
early, and establish the basis for the long term relationship we would then
negotiate. We will also much better understand the positions Royal Mail will take,
areas of likely agreement and areas of contention prior to formal negotiation.
b) Establish a more direct influencing relationship towards Moya Greene (RM CEO).
We have now agreed with Royal Mail that review checkpoints together with both
CEOs should be introduced during and at the end of the joint strategy project.
c) Develop the full business plan and the implementation plan for the next best
alternative between now and March 2017, in order to ensure we have credible
leverage and a better understanding of its costs, benefits and risks in order to
help set our walk-away position in any negotiation mandate with Royal Mail.
d) Fully document, internally challenge, and align on our primary deal objectives
when taking into consideration the business’ medium term funding position. We
expect more clarity on the funding position over the course of this financial year.
e) Develop a detailed, costed, negotiating mandate between now and March with a
deeper understanding of Royal Mail’s likely starting position, areas of potential
agreement, and our walk-away triggers with respect to our desired outcomes.
f) Exploit opportunities above and beyond executive interactions in order to
influence Royal Mail and their own stakeholders towards our primary deal
objectives. This may require opening a more detailed dialogue with external
stakeholders, including Government, to help influence RM’s position.
g) Continue activities to deliver “no regret” actions which stretch or extend the MDA
in ways that change the landscape from which we will then renegotiate. This
means: further development of our Drop & Go proposition to grow loyalty and
customer insight from small business customers; development of new propositions
to gain greater share in the Click and Collect market; devising a market-leading
returns proposition; and developing the business case for a mails product
proposition unavailable from Royal Mail (e.g. international time-definite delivery)
in order to demonstrate an ability for us to partner with other providers in the
market where doing so is permissible in the MDA.
h) Continue across the whole business to deliver on the strategic priorities as set out
in the five-year plan to FY20/21. This means investing to reduce the costs and
complexity of Post Office Ltd whilst enhancing our distributional capabilities. Aside
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from its wider business objectives, this specifically: further improves our
attractiveness to RM as a partner above their other alternatives; further improves
our ability to move to an alternative Mails business model in the event of being
unable to secure an acceptable long-term arrangement with RM; and further
strengthens other business lines such as Financial Services and Identity to help
mitigate downside risks in Mails and grow other profitable income streams. We will
need to ensure that ministers are aware of the critical link between our funding
request and our time-limited opportunities to prepare for negotiations with RM.
28. We also have the power to generate leverage through antagonistic actions in the
current MDA, for example refusal to work constructively together on assessing or
implementing Royal Mail change requests. That would develop a mutually-destructive
working dynamic and we are not at the point of needing to consider this.
29. There is no material timeline change from that we set out in June. As previously
stated, we expect to return to the GE and Board in March 2017 to seek a negotiating
mandate, and our objective remains to commence a renegotiation with Royal Mail
early next financial year. We anticipate May 2017 to November 2017 to be the window
of our maximum negotiating strength towards Royal Mail. We have the scheduled
contractual mid-term review in May 2017, we expect to have a combined strategy
completed and bought into by both organisations by April 2017 and we will have
gathered additional intelligence of RM’s likely intentions through our work in the
interim. Beyond January 2018, our next best alternative options would lose credibility
(and indeed become un-implementable in the timescales we need) without
commencing any procurement exercise. We can now provide a more detailed view of
our decision path than we did in June, and this is set out in the schematic on Page 12.
30. The most complex decision point that we can see over the next two years is a
November 2017 “go” / “no go” decision on launching a procurement exercise for
logistics partners to support our next best alternative:
e To recommend a “go” decision in November 2017, we would need to have
revealed both our “carrot” and our “stick” to Royal Mail and still have not secured
entry into a meaningful negotiation with confidence in the outcomes we need. This
would mean both time-limited final incentivisation to buy a longer duration
partnership, as well as some element of disclosure to Royal Mail about a “Plan B”
to become a mails provider in our own right, directly competing with them.
e To recommend a “no go” decision to the GE and Board in November 2017, we
would need to have established, and entered, meaningful negotiations regarding a
long term deal. The terms of negotiations and their end point would need to be
set in such a way that we face no erosion of our ability to implement our Plan B.
31.In conclusion, our timeline remains on track but the task ahead is of high challenge
and high complexity. We must deliver a compelling joint strategy together, increase
the scope and pace of development of our next best alternative, deliver on our no
regret moves, widen our influencing strategy towards RM in order to increase our
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POST OFFICE
chances of a desirable settlement in our timelines, and deliver against the wider
business objectives set out in our five-year plan.
Timeline and Decision Path
2076/17 2017118 I 2018/19
Contract requires both carties to
Existing contract
°No Regret maves which
Earliest point:
notice may be received
‘from Ri el intent to
@ MDA exclusivity
2019/20 2020/21 2021/22 «I 20:
Provisions that cease include:
+ RM no longer commtied to
using us for sale and
sccaptance of ts products I yaa expires
= We cen bath target the
‘other's customers
+ We can sel competing
products
formal provisivns fall away
and relationship Aaticipates inoome loss to
Post Office of minimum
£50m pa,
Co-deveinp jcint
strategy
{in progress)
Preferred renegotiation
tmetine
Jan 18: Last availatle point
{0 infite tenders and have
confidence i deliverability
22/23
Post Office has
‘no Mails
business
Existing MOA provisions replaced ty a renegotiated agreement with Roys! Mail
Next Best Alternative
(NBA)
GE and Board
decision
points
=
Ey
3
g
$
i
‘Go! No-go decision on
altback’ te commence
procurement of NBA
a ee
ere
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Appendix 1: Joint strategy project outputs
The following slides form an executive summary of outputs from the joint strategy project
work to date. Further supporting detail is available in the reading room if required.
Joint strategy: scope and progress
Avsets.
capsbitios
Heads, wie
and profie of
Environment
Phase 1) Share data and a a ee
intelligence - COMPLETE ~s * , f
Phase 2) Establish a common baseline! “ane ae 99 compete ews
Analysis of compernor
Coven set peo we igs our es
-ssqumgbons on te rarsel and competion 808
row wo ean best respon? « COMPLETE
jens, weaknesses, opportuiies arc teats
2 Se
Combines ratysts of PR, anid RIE StrengInS, wenesHENeS, OpseRRUnINE
ans teats
3) Vielon and offer of fubare apie vsi0n Sor out pin tunes ana uncerng geste.
business ~ NOV 18 te JAN 17 Faget customer journeys
sweetie oy capa need bot binesses
Reesencatse chou i
What erocvenservoes ei we afte: fo what
esses, 300 toca wich aes?
ve cost cee et ps sm
Phase 4) Develop otfer and operating model~
JAN to APR 2017
‘Custarer and channel value pespesttons
combine chau eaqtements ecto, sewers ee)
ex
saa arene die ot ee et seve nd entation ana itt assessment of preeced opereg, cotoong.
‘se chico, ae weit meds fo omange? ects ‘Passes
& Royal Mail Group
Market overview
‘The addressable letters and parcels market is ie gradual decline
“he overall eters and parcels market in slow cine
its Approximately -2% CAGR across the full UK ard export postal market.
Expo tonic seec 2% CAGR change acoss vrais an parcels fr he aatessablecombineé POL and IMG
><] Decline in both overait and addressable market is driven by reduction ia fetes
PAS, 5 overa coe sosice of decine is leter with a 4.6% CAGR defo «-substuton and techie innovation. Whe some
overaf growth is forecast m parcets(1-3% CAGR ), tis does not ofbeline impact ofthe letters decine
Growth forecast ia parcels ~ but in a competitive landscape
Online B2€ sales driving growth
‘ncrease in onine Retal ans Marketplace seting represents growth opporuny for parcets (3% CAGR’),sotums (¢-20%
CAGR") and Click ane Colest
ajo growth forecast in overall Cick and Collect (<32% CAGR foal overall) but this ie a smal segment of the market (c
‘44reby 2018) The addressable market (Le. out of store*PUDO cick and collect rate of growth is sioner at 18% CAGR
(2016-2026) wote ths is stong, itis currently only £% of te total e-retal delivery market, and wil se Sess than 2%
2024
ver capacity inthe markt riving incensed competion
POL: RMG nas a iarge markel share in Large Leties and Small Parcet cafegories (e ¢.c. 70% volume of Markefpace
Sellers for these producs), but MyHecmes isthe sirongest in Madiurn end Large Parcels hese products represent 56% of
Mareeigtace Seer volume vs S% for POL FBAG)*
‘Over-eapacity causing compeiton on pricing and margin squeeze. Historically, RM and POL have moved sway from the
Medium ! Large Parcel sectr ave to inabifty to compete on price in these segments As compedtors seek to move ito the
Land SP segments, these areas wi also become increasingly chafenging
SRE HR tet es Coelooe oe
Sov Vanes Tae Vue
Shree Mec Selt Sept Vw oy Aug 9°6 POU RUG Ont Fenn Act,
Royal Mail Group
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Competitor overview
‘Competitor threat comes not from a single organisation but multiple layers of threat from different competing models
= Royal Mail and Post Office as combined businesses have a large market share in the parcel and delivery market for
consumer and sub-account level small business customers, This is a legacy from the monopaly position and competitors ste
ooking to erode this share ip ali segments.
+ Competitor landscape is evolving putnatily due to technology innovation enabling
+ More efficient processes — ans therefore better able to campete on price.
+ More rapid edeption to market changes — so can keep pace/ stay ahead to maintain competitive advantage.
+ Setter customer experience — wihich drives increased expectations from 4 more online focused customer base.
{Mais not core business but + Disitermedation fo contol
AMAZON yey clement so operating in _=fifeulomer experience
this atea wth sgnificant Targeting key praftabie Materia, evottonary
Challenger Droaderinfvence. Presence POL RIG segments 5] change f mandting ow
eben asec ant ciop ot pos. + Erosion of RG! POL band services
KAY aint to mandate customer via commostsaion of
E behaviout postage
= collects Hetwork nated, similar mode!» Compete in suse of AE
5 1oRMG/POL More agie and market o henry sick OS
Traditional — aman technciogicaly inovatve ‘rate segments ged. Sonticued oraduat erosion
E Betler customer knowiedze. > Further gracualerasion of
rmatket share
Iovate organisations —«*‘Focus an part ofthe valve Less pregctabie, Could ve
‘esting market iseeptors in diferent aceas
could have material impact
Sprain a torent Chanerpstovarmanet gw) Sousive mimpactee
Dusness madeliogisniotihe Segment es areas, Miso aie
Royal Mail Group
Customer overview
‘Our customer expectations are evolving and competition is seeking to deliver a better customer experience.
We need to improve understanding of our customers to better meet their needs and keep pace in a changing
market landscape.
‘Segmentation overview fecused on customers using Post Offices for.
* Purchase o srop-off
+ Primary consumers and sricra SMES
+ Small Professional Firm and SME supplementary purchases and drop- for businesses that don't get a collection,
General customer context
Customer expectations are increasing
Customers exposed ta improved online capalties across industies. Growth in postal industry is driven By online
shopping so this demographic is particularly used to managine activiies ‘on the move’ with increased expectations of
immediacy These expectations are being applied to both sending and receiving parcefs, and are reinforced by
‘compeflors raising the bar on custamer offer and experience e g. thiough improved tracking capa
POL! RMG brand is strong but this is @ legacy strength and heing eroded
+ Gustemers increasingly familar and satistied eth otter brandis, commoditsing pestal services — POURMG seen
as less relevant
+ Competitors improving their quaity of service,
y
‘We have very limited customer data compared to competitors
Compettor models by default capture more customer information enabling improved customer insights, POL/ REGS
has snsuficient eepabity m this space when data iteligence provides 4 competitive advantage.
Royal Mail Group
0 a8
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SWOT conclusions
POL! REG have a future in the mais market but our combined strengths are legacy ones and we are in a defensive
position iv a 9 market place.
4A key driver of change in the competitor landscape i in technology and online capabiities. POL’ RMG will seed te stay
‘elevant {at a minimum} in order to compete and maintain market share in a landscape of evoling consumer
pehaviours
Growth of market share ts unikely in our tradiboca market given the legacy monopoly position and we wil have fo work
hard and be more efficient te maintain our current share.
‘Grove in new markets is feasinte (e.g. Click and Coltect) — ut these markets are smat so expectations on impact on
‘vera revenues and mamgins need to be realistic,
Key competitor strengihs are noted as agiiy to respond io markel changes and lower cost base. For ow combined
businesses to maintain share in a price sensitive market where brand strength may become less relevant, we need fo
fook at how we can manage our cos base in ores to stay competitive on price and also fund any technical
enhancements
“Success andl falure is driven theough getting the customer experience right and keeping @ relevant for evolving
customer needs expectations are increasing given Amazon and MyHermes experiences, and broader
‘access to technologies across ether industnes and purchasing behaviours (use of smartphones, increased eniine
behaviours etc} Abikty fo keep pace with these changes is fundamental to ongoing success.
‘Sains af Sir key siengis snd Weaknesses ave ted fo Gar om Working. Staying together we Fave an ead to end
network with a strong brand presence and comprerensive product ofesing. There are, however, commercial fensions
and operaticnal complenily as 3 result of beisg twe cruanisations. This impacts our combined aniily o respone
effcienty to the competion, Improving this should De an area of focus.
Royal Mail Group
Appendix 2: Next best alternative outputs
The following slides form an executive summary of outputs from the next best alternative
project work to date.
Initial economic modelling of Post Office as a Mails provider in its own right
saline Scenario : NBA Scenario
‘The Baseline . I forthe ha strategy were to Be launched fllesting the flava in exctusvity provisions ia
ascumes a ery 2020, we would expect our FY20/21 financial orofle to be very diferent. We woud
‘ake contro ofthe custome aropesition and product range, book all revenue we receive,
end bear the cost of delivery through contracts with Logistes Service PravicrIs! [LSPs
(Gur projections have bees Geveloped through a boctom-up exercize, drawing on Inout
‘rom logistics and reguiatory experts. They reflect conservative estimates of the
anticipates cost base st tas arly stage. Further deralles work i required to evaluate ovr
assumptions, and ta eabish a ‘best and "worst ase from detales sensitivity anaiwes
continuation of the
current relationship
vit
Potincome:
£5,193
RE contine to take
sales, neve presicted
r
]
i
1
'
'
i
1
\
i
1
wbecetsenot I ‘Our core assumptions are as fostows:
wehien anetrevenve I fie Jeo ae
serum I cei FevenceI We expec ft ret camer rf may anneal op na] P: Hah
conmmeceecotnete I ST [oozes secs chewets We terete expec tates ICON ako Acca veI volume
‘oeration cst and I Raval Most net pokes I wettice competion uae me scop vourne.Ourteteortrecsana. [Low's
eit 1 feven from Former behavow welep tan spear volanas hee, east [Mesrs
totum sole srr pce tne
Nowe mths I cecepted ri pedicel Sa Tea. ae
counterfactatwe I ehrough our nal ccine woes Coane [aay walar Saa ae flaw
sare POLives I bananas alacin Tne are ohare cao fo Pe
‘c£50m income trorm bs arvant martat asad productieve exit from Uk hs, we expecta adhere I Wesium™
srewced medtee I poy, Sever tes deta curiewerenatons ete se
edconracrvaie I" 3sam eee ee er
re the averall agent's pay pot for a period of 2-2 years m the Basetine:
foviongewsy H Ssvacteaupper te "hi ti be frst bara our apes
(ur DPC is therefore H peal conga efor ret eo) r
ur DPC sha H eine ce forthe even) nse ow
expected to fatto i Mang cots have buen Suda ramon prac, Wa woud rege I Medium
E50 in FY20/ + oorgmisason with 6079 FTEs torun te Mas business and aoproorate
onstncine cen onsen ofa Cates Savas anton tbe cecund). 2020/21 NBA
(excatne Poection I indent pojecion
See ee Re eek eee eee re
Oo}
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POST OFFICE
Delivering the Next Best Alternative Mails Strategy:
Where we are on the scale of maturity and our readiness to implement
‘Corsiteraly mate woth will be needed before any “go dechlon could be contemplated and we ate ateaty on a cca path We tacomiae
Detoaen ton and 2020's oneaken a cesta stages, i ety vaste me numbers ana te mplemeraton rks
ta
Cee
se sk ou a Yes aah nae
plementation pocwarn 65 wut tos gpa et eanlaeediae II
whey be gates feo ar es me ee cs I
Full Business Case at
Vendor selection & pce I
“aldaien
uttine Business Case
Level of confidences / aby to implement
Detated sotuton design ané I conffence m ne os0e “An outline business case wad conlain the best avatatle design ofthe
oaigs ra lien tees oovaby conagos he athe, machin
Fatt snes plan 1 --—--—------g}/" I_I SE, Bais Se se avout oan or
Draka ond oad fi ; _ Procurement acess (via CUE) ané present tenders te the rank.
med t : Hi
High fevet business plan —_ i
! Esedyts ah Oy be can Pot
tanning mobiised H = i rp lps nh
ee 16 16 ar 37S Now 7 Ee
yer fa way
Offering other providers access to our sales channel as a “mail supermarket” is a
contingency but less likely to be a sustainable strategy
PAGE 16 OF 16
1.2550
“Supermarket” Scenarig >
We have considered the potertalimaact cf becoming @ ties thanne! to mutipie providers. This remaits 3 vid
cconzingency but impiemensation woud fe a non-eval exercise in self and would require significant
procurement tnetnes, similarly to the option of being @ Mais provicer i our own Ant
(We have assessed this scenario uncer the same critical success criteria as the Malls provi oation:
IL._ Deliver proftabte income aver the fong-term for Past Office
+ We are cerin to lose any excisty premium from Soya Malt and we would own no mare ofthe vale cain
associated with ou as products than we do taday. We would expect a sigiicent ving fo lower margin “accept
‘ony volumes than higher margin sale and acceat volumes.
Product providers pera wit ow margins snd industry practice has aiteady estabisned a ower vaive snare for
‘etaes shan Post Otfice enjoys today.
Otter the hest in class proposition for our customers
ovat tei net Providers would nat wish to set cough al our branches, consiering ther low expected volume and cox of
eenueffon ‘colection from our smaler branches, As 3 reaut customers would experience en ‘nconsstet service ofeing
towme std? 7055 our network,
occepted through ‘We would stauggie to guarantee minimum per branch volume to any providers this mode! and we would mast
"oer beonches Skety aged to let 2 contract to catect fram cu branches and consolidate volun, silly tothe option of being a
‘Mais provider nour own ight. Ationahand-oM inthe desvery Cha increase comaplny ane serie st
POL Income: 3. Support the fong-term sustainability of the netstork and our agent proposition
253m
2020/2023
(acelin Projection)
220/202
eet”
Taare SR rsercacs IF Agee Resaneanse BH Dv
+ Significantly mone eutomer options fora single maf erm vil nevease transaction time, Systems and processes
WOUIS need to support peosict / provider varlation azo: the netiverk, aswel 32 the cesuivement 0 ac8Dt ond
‘change product sets at branch evel on a more repuler bask.
+ gents wouts be requires teacere to SiAs from mubtiple providers anc nave knowedge on wider range of
oduct providers. They may alo have to manage reguar change: inthe oortioi of product they offer.
4. Ade value to our brand
‘+ Wetoelieve the vis of inconsistency of offering across tre rework means ies chance to ad valve to our brand
‘han taking ownership of the pecouct ourselves
ON
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POST OFFICE MANAGEMENT SERVICES LIMITED PAGE 1 OF 8
REPORT TO POST OFFICE LIMITED BOARD
Hi 2016/17 Report to the Shareholder
Presented by: Nick Kennett, CEO POMS
Executive Summary
Context
Post Office Management Services Limited (“POMS”) is a subsidiary of Post Office Limited
(“POL”); it undertakes insurance intermediation and is regulated by the Financial
Conduct Authority. Under its Articles of Association, POMS submits a performance report
every half year to its shareholder. This paper is the report for the first half of 2016/17.
Questions this paper addresses
e What are POMS’ strategic objectives, shorter term goals and Plan?
e Is POMS delivering what it said it would do?
e What are the key constraints in delivering the short and long term plans?
Conclusion
POMS is on track to deliver its long term ambitions and strategies, confirming the
benefits and opportunities of operating as a standalone, regulated business within POL;
there are, however, a number of risks and dependencies:
Financials:
e While EBITDA was £(1.0)m to Plan at £4.9m, mainly due to weak branch travel
insurance sales (income £3.3m behind Plan), margin management and cost
reduction should result in a full year EBITDA of £7.9m (£(1.2)m adverse).
e¢ POMS’ regulatory capital is above that required by the FCA.
e POMS is, however, concerned that changes to POL's branch sales model, in particular
the removal of Financial Specialists, will impact life assurance sales/income from Q4.
Building the future model:
e In May 2016 the POMS Board approved a five year growth plan aligned to POL FS’
New Normal; it is targeting an EBITDA of £17m in 2020/21 and a contribution to
Group profit of £43m. This is on track against the original POMS business case.
e The achievement of the strategy is depends on POL’s delivery of services, including
marketing, digital delivery and data analytics. These are not governed by SLAs or
service contracts; discussions are underway to establish accountabilities, incentives
and delivery requirements.
e¢ The “Hawk” business acquired in 2015 is outperforming the business case.
e The new strategic technology platform (Zeus) is on track for delivery; this is pivotal
for POMS to integrate other general insurances and expand in the value chain.
Governance and compliance:
e Risk and governance structures are in place and being embedded.
e The most significant risk issue remains the operational oversight by POL of its
branches, as discussed at the Post Office ARC in September 2016.
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Input Sought
The Board is requested to note the report.
Strictly Confidential POMS Hi 2016/17 report November 2016
POST OFFICE MANAGEMENT SERVICES LIMITED
REPORT TO POST OFFICE LIMITED BOARD
The Report
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1. Financial delivery in the first half and outlook for the Full Year
YTD YTD Forecast FY Var
Em Actual Var to Plan Plan to Plan
Net Income 20.4 (3.9) 394 42.4 (3.0)
People Cost (1.4) 0.6 (3.4) (4.1) 07
Marketing Costs (1.9) (0.5) (3.0) (2.6) (0.4)
Non Staff Costs (5.8) 15 (12.5) (13.2) 0.7
1B Costs (6.4) 12 (12.6) (13.3) 07
[Total Expenditure "(155)" 29 " (34.5) ” (33.3) 1.8
EBITDA 49 (1.0) 7.9 9.1 (1.2)
(Other i) Ot (0.5) (0.8) 0.3
EBT 48 (1.0) 74 8.3 (0.9)
[Capex em) 07 Gi)_@5)___(.2)
* “IB costs” are Inter-business amounts paid to POL for commissions and services
1.1. Half year to September 2016
POMS trading profit (“EBITDA”) YTD was £4.9m, £(1.0)m adverse to Plan.
Income was £(3.9)m lower than Plan, principally due to weak Travel insurance
sales in branch £(3.3)m:
¢ The Travel insurance performance was a result of lower sales volumes in
branches in Q1. This was reversed in Q2 by the introduction of a promotional
discount aligned to the purchase of travel money. While volumes recovered,
this impacted on margins, which were c20% below Plan.
* POMS partially mitigated the trading impact through various cost initiatives.
e Since the promotion ended in mid-September, travel insurance volumes have
remained at c115% of Plan; average commission per policy has recovered to
95% of Plan.
Staff costs are £0.6m lower than Plan due to release of bonus provision for
2015/16 and vacancies not being filled.
Marketing costs are £(0.5)m higher than Plan due to higher Travel spend
associated with the promotional activity, while non-staff costs (excluding
Marketing) are £1.5m lower than Plan mainly due to contact centre being £0.8m
lower than Plan.
Commissions payable to POL (Inter-business costs) are £1.2m lower due to lower
travel insurance sales.
1.2. Outlook for the rest of the year:
The forecast projects a shortfall in EBITDA of £(1.2)m versus Plan, implying a
£(0.2)m shortfall in H2. The main factors contributing to this are Travel insurance
income which is forecast to be £(0.1)m lower than Plan in H2, and a stretch target
in the Plan for Motor and Home insurance.
There are a number of risks and opportunities to the forecast and we continue to
work to reduce the gap versus Plan.
A potentially significant risk is the impact of potential changes to the branch sales
model. Further details are set out below in 2.4.
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1.3. Regulatory capital
POMS is regulated by the FCA and is required to maintain at least a minimum
£0.7m of qualifying capital at all times. As at September 2016. POMS’s qualifying
regulatory capital is £6.5m more than the minimum required by the FCA.
The year-end forecast is for qualifying regulatory capital to be £5.7m higher than
the minimum required. This figure includes an estimated £2.1m post-tax profit
tax to be earned in the second half of the year.
A current balance sheet is set out at Appendix 1.
1.4. Cash
POMS had £17.2m in cash at bank at the end of the half year. This is balanced
by £5.9m due to POL for commissions, £1.7m due to insurance third parties,
£5.5m of reserves and £4.1m for working capital.
2. Building the future model
2.1. POMS’ strategic objectives
© To deliver operational efficiency, product and pricing flexibility resulting in
greater control of, and access to, the value chain.
*® To establish direct control of customer management, policy conditions and
retail pricing.
¢ To build directly or enter into agreements with Underwriters, TPAs and other
suppliers to procure and develop the capabilities required to support the
chosen business model.
* To build a profitable asset for the Post Office whilst optimising returns.
2.2. The 5 year Growth Plan
The 5 year Growth Plan was approved by the POMS Board in May 2016. It is
founded on new business and operating models, and is aligned to the POL FS
“New Normal”. This will provide the environment to enable POMS to provide its
customers with enhanced service, control, trust and value by:
« Securing end-to-end responsibility for delivery, balancing internal and
external resources, and increasing access to the value chain;
« Ensuring POMS meets the needs of more customers, by evolving and adapting
its products and increasing customer awareness.
The delivery of the plan will increase POMS’ EBITDA to £17m in 2020/21, making
a contribution to POL Group’s profits in that year of £43m.
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2.3. Significant progress has been made towards these objectives in H1
POMS has successfully integrated the general insurance business acquired from
Bank of Ireland in 2015 and this is outperforming the business case.
Internal risk and compliance capability and processes have been developed.
The development of the strategic technology platform is on-track for delivery in
December 2016, enabling further expansion of POMS’ participation in the general
insurance value chain.
The retendering for the provider of POMS’ protection business has been
undertaken and contracts are targeted for signing by January.
2.4. There are challenges ahead
While the financial performance is broadly in line with the trajectory set out in
the 5 Year Growth Plan, there are significant delivery challenges/risks, including:
Market and Sales
« Managing the impact of political and economic change, particularly:
o The impact on travel, and hence travel insurance demand, of Brexit;
o The decline in Sterling;
o The impact from further interest rate falls on protection products.
e Ensuring that Post Office is able to deliver anticipated sales and service levels
as it manages its strategic priorities. At present the majority of life assurance
sales are concluded in face-to-face conversations by Financial Specialists. POL
is considering eliminating this team and concurrently building a sales team in
agency branches (“CRMs”). While this will reduce POL’s operating costs, the
CRMs will not be qualified to complete life sales, referring the opportunity to
contact centres. This risks both reducing POMS’ income and increasing call
centre costs; the potential impact has not yet been included in POMS’ year
end forecast or 2017/18 plans while full details are assessed.
AR and Other Risk Management
e Managing the impact of regulatory change, particularly relating to conduct risk
and the implementation of the Senior Manager’s Regime in insurance in 2018;
e Ensuring that Post Office is able to deliver the level of branch oversight and
management required under its AR obligations.
Services from POL
e POMS does not have its own Marketing, Digital Delivery or Data Analytics
capabilities, but instead relies POL to provide these. However, the
arrangements are currently not governed by SLAs or service contracts. The
POMS and POL teams are working together to put appropriate capacity and
governance in place, but there is a near term risk around capacity in POL.
POMS’ resources
e Having the necessary staff resources, technology and operational and risk
management processes in place to acquire and integrate the Junction GI
business in 2018/19.
POMS Management and the Board monitor these risks and seek to implement
strategies and investments to manage them.
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2.5. Performance of the “Hawk” business acquired from Bank of Ireland
In November 2015, POMS acquired Bank of Ireland’s interests in the general
insurance business that it had with POL (Project Hawk).
Since acquisition, the business has performed ahead of the business cas:
Benefits £m 2015/16 2016/17 Total
Actual/Forecast 1.6 44 6.0
Business case 0.3 3.8 4.1
Surplus/(Deficit) 1.3 0.6 1.9
The business case also incorporated further benefits in the years past 2016/17.
A review of those further benefits showed:
e The initiative to take on more of the value chain through buying-out main
general insurance supplier (“Junction”) now has lower gross benefits, but a
greater certainty of delivery. The net impact of these factors on the value case
was a drop in NPV of c£(10)m.
e Slower growth in existing business and slower growth in new products versus
the business case, but with an increased certainty of delivery for both. These
resulted in a £4m improvement in NPV.
Overall, the review showed incremental NPV of £25m versus the original £29m.
This reduction in incremental NPV is a result of the very conservative approach
the review took to valuing the benefits, particularly those from new and existing
products. If, for example, the valuation had recognised 50% of those benefits
then the incremental NPV would be £35m. Noting this, POMS is happy that the
acquisition is on track to deliver at least the business case benefits.
2.6. Project costs
The key projects in 2016/17 are:
« The new strategic technology platform (Zeus) is on track for delivery; this is
pivotal for POMS to integrate other general insurances (including the
integration of the general insurance business from Junction in 2018) and
expand in the value chain.
e Putting the new life assurance relationship in place (Project Hera) - on track
for delivery in early 2017
e Delivering the new MI system (Project Sequel) - delivered.
Costs are forecast to be on Plan, other than Project Zeus which is expected to be
£0.3m over Plan at £4.2m. This additional expenditure will be recovered in later
years.
2.7. Governance
Board, ARC and executive committees are in place and fully operational, in
accordance with structures set out in our authorisation submission.
An in-depth Board effectiveness review is underway and will report in January;
the results will be included in the full year report.
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3. Risk management
Risk management framework and governance structures are in place and are
being embedded.
The relationship with POL as both AR and service provider is in place; the most
significant issue, however, remains the operational oversight of branches, as
discussed at the Post Office ARC in September 2016.
Significant progress has been made to improve the systems and controls. Actions
are being developed by POL and POMS to improve the levels of conduct risk.
At its meeting in January, the POMS Board will assess the progress made, or
anticipated, and will assess whether it is comfortable to allow POL to continue to
sell POMS’ products in agency branches.
There have been no notifiable issues to the FCA in the period.
4. Conclusion
POMS is now well established and performing broadly in line the expectations.
The key building blocks are being built or are in place and being embedded. The
five year plan forecasts income and profit that exceed the original business case,
confirming the significant opportunity that POMS provides to its shareholder.
However there are a number of risks and constraints that may restrict POMS’
ability to deliver its Plan. The POMS Board and management are actively
monitoring these risks.
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Appendix 1: POMS Balance Sheet
£k Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16
Non-current assets
Intangible assets 46,008 45,994 46,979 47,089 48,571 48,369
46,008 45,994 46,979 47,089 48,571 48,369
Current assets
Amounts owed by group undertakings 225 386 381 525 0 0
Other debtors 197 73 126 189 150 293
Accrued income 5,386 5,350 4,830 3,845 4,571 4,250
Prepayments 32 27 23 18 155 130
Cash at bank and in hand 15,999 11,497 13,483 17,815 17,928 _17,170
21,839 17,333 18,844 22,392 22,804 21,843
Total assets 67,847 63,328 65,823 69,482 71,376 70,212
Creditors: amounts due within one year
I Trade creditors (550) (473) (663)_-— (718) = (1,101) (1,203)
Amounts owed to group undertakings (7,888) (2,345) (3,231) (4,529) (4,900) (5,853)
Other creditors (1,374) (4,515) (1,859) (2,749) (2,442) (1,880)
Accruals (4,296) (4,305) (5,054) (5,234) (5,912) (3,537)
Provisions (1,033) (1,063) (1,121) (1,125) (1,131) (1,182)
Tax Creditor (195) _(379) __(432)_(678) __(831)__(965)
(15,335) (10,079) (42,361) (15,034) (16,317) (14,619)
Total assets less current liabilities 52,512 53,248 53,462 54,447 55,059 55,593
Creditors: amounts due in more than one year
Amounts owed to group undertakings (500) (500) (500) (500) (500) (500)
(500) (500) (500) (500) (500) (500)
Net assets 52,012 52,748 52,962 53,947 54,559 55,093
Capital and reserves
Share capital 50,000 50,000 50,000 50,000 50,000 50,000
Retained earnings 2,012 2,748 —-2,962_3,947__—4,559 5,093
Total equity 52,012 52,748 52,962 53,947 54,559 55,093
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BOARD DECISION PAPER
Back Office Transformation
Authors: Rob Houghton/Angela Van Den Bogerd — Sponsor: Alisdair Cameron Meeting date: 24 November 2016
Executive Summary
Context
In 2015, the Board approved a “Transition” project to reduce operational risk and
stabilise Back Office hardware. An update was provided in September, which reminded
the Board that, in line with the IT Strategy, a further stage of development
(Transformation) would be required. The purpose of this paper is to agree the proposal
for that Transformation. The Board has not previously approved funding for this element
of Transformation, although the Three Year Plan has included a place-holder of £11m.
Today our Back Office systems enable POL to run the Supply Chain operation, settle
with clients, pay agents and employees and report financially and operationally. If these
systems fail, we cannot trade. Some £60b of transactions are processed over a year,
affecting all locations and over 50k people.
The September Board paper highlighted that, “We cannot continue to exist in the
transitioned state...” IT cannot commit to appropriate service levels across these key
business processes and we have now received a written confirmation from SAP that its
support for HR SAP and POLSAP will cease permanently in December 2017. This is not
a theoretical risk: that support was used in February to resolve a three day POLSAP
outage, which had Supply Chain working manually while we were unable to report the
Bank of England’s cash position and teams spent weeks re-inputting and reconciling. It
is not been uncommon for the settlements team to pay clients based on estimated
values, adjusting to actuals later.
The legacy complexity of these systems and the processes that work around them
requires manual working, spreadsheets and multiple interfaces. It is hard to maintain
strong control, as evidenced in the financial controls work, and limits our ability to report
and analyse our results. The resultant complexity has led to a prohibitive cost of change,
preventing improvements that should occur in business as usual, and higher run costs.
Questions addressed in this report
1. Which transformation options have been considered?
2. What is our recommended approach?
3. What are the key risks to a successful delivery?
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Conclusions
The back office application estate cannot stay as is. The minimum spend is £8-12m to
upgrade and stabilise the systems, without delivering any improvements in the cost of
change, IT run costs, control or future flexibility.
We have assessed three other options: removing the older systems; incrementally
improving the way we work; and replacing everything with a completely new ERP
system.
We are recommending Option 3 as representing the right balance of financial benefit,
operational control, flexibility and risk. The cost increases to £16-20m to gain £3.5m
lower operating costs and enabling a further £3m to be realised across other programs,
with improvements in controls and ways of working.
The risks are significant, although substantially less than for a full ERP replacement. We
know from experience that any change to Back Office will be a journey of discovery. We
have a 17% contingency in the plans, which had already been adjusted by 7% following
Wipro’s independent review.
More importantly, we have developed the project in stages. We can progress Option 3
while retaining Option 2 as a viable alternative until we have proven the full concept.
The next significant decision date is April 2017. The only spending commitment at this
stage, approved by the Group Executive, is for £1.54m on top of the £0.2m spent to
date.
Input Sought
The Board is asked to:
- Support the preferred Option 3, budgeting for costs of £20m
- Note the approved spend to April 2017
- Require an update and any future funding requests in March-April 2017.
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The Report
Which transformation options have been considered?
4. Four approaches are summarised below.
IT Dept. eeiee ie Business Project
opt cost I opex I irpisk I opex I NPV I Payback an jor I audit & I Efficiency Risk &
tion (em) I Benefit I (inc.0R) I Benefit I (Em) Yrs other Controls I /Fitto Delivery
(em) (em) alia Strategy Complexity
1. The “No. Medi
Transformation I 8-11 oa v ° 8.63 26.46 0 x x eclum
/High
Scenario”
2. Remove Old 13-16 3.0 v oO 9.0 46 2.1m x x Medium
Systems /Migh
3. Transform 16-20 3.0 v 04 -1L9 5.74 3.1m v Vv High
4. Transform to 24-30 3.0 v 04 24.2 8.62 3.1m v v Very High
new ERP
5. The first option enables no movement in improving control or flexibility and derives
no benefits. The fourth option is substantially more expensive and riskier with no
guaranteed additional benefit. Neither are therefore recommended.
6. Options 2 and 3 represent more nuanced choices. In both cases, we would remove
POLSAP, HR SAP and our old warehousing systems. Option 3 additionally adopts
industry standard processes, changes ways of working and will give us the flexibility
to support future change quickly and cheaply.
What is our recommended approach?
7. We are recommending option 3 Transform, with a number of checkpoints enabling
a fall back to option 2 - “Remove Old Systems” should costs/risks escalate. Option
3 is in line with the IT Strategy:
> Simplify, Standardise, Reduce Cost: adopt industry norms; configure
systems not customise. This makes it easier and cheaper to outsource should
we choose to.
> Build in Traceability: Transact sales in ERP allowing onward transactions and
reporting to flow from a single view of sales. This will give us one version of the
truth; sales data that is accurate and reliably so. Improves auditability, reduces
report creation and validation time, changes employee focus to analysis and
action.
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>» Create Capability: Invest internally, ensure end-to-end process knowledge and
technical skills are in-house and enables cheaper change delivered without third
parties.
> Deliver Small, Deliver Regularly: Break down large goals into achievable
pieces of work, build momentum, hit targets.
8. Key building blocks include:
>» Designing out POLSAP and HR SAP migrating processes to other existing systems
simplifying the IT landscape
» Processing sales transactions in ERP, enabling settlements, invoicing, agent
remuneration, profitability analysis and sales reporting to occur using standard
SAP functionality - with auditable linkage.
>» Replacing 3 old warehouse management systems with a single modern solution
enabling process savings and online ordering for all branches.
> Improving retail cash management, linking directly into our core finance system
and enabling online ordering for Post Masters
9. The diagram below summarises the planned delivery scope for this program.
PROCESSES CHANGE & PEOPLE TECHNICAL
® jou from admin: &
repart creation to data set Hierarchies
# Agents Remuneration and analysis % Agent master anid
> Agent Debt > Client engagement and channel hierarchy
» Cash Processing and standardised & Agent Contracts
Treasury invoicing & Sales Organisation
F Procurement interaction ® Sales transactional flows
> CostAccounting n of staff and rc
nt Contracts
> Product & Channel overtime Chart ot Accounts, Cost& ig ranality to
Profitability Analysis Profit Centers Transtrack
® Warehousing ® Remove or adapt 56.
interfaces
10.Future flexibility: Using more of our ERP’s features requires embedding core
p
bi
>
rocesses in system steps. This can lead to reduced flexibility and the impact on our
usiness has been considered. The following are core to the system:
Organisation Structure — Post Office’s divisions and channels will be created
as core structure. These are simple to add to, remove or group, but difficult to
split or completely redesign. Upfront design needs to gauge the level at which
these are created carefully.
Financial Principles - One challenge currently is that the financial principles
(e.g. what is our definition of a profit centre?) are not consistent. Once these are
established, they are difficult to change.
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> Detail - The detailed list of profit centres (or other elements) can be added to
and modified simply. Multiple product hierarchies can be created and channel
reporting can be available by a number of selection criteria.
11.The highest impact process being tackled is client settlements. KPMG recently
conducted a detailed review of our 440 client contracts detailing our approach to
reconciling and validating each back into our accounts. The settlements team has
been involved setting the high-level direction for our approach and will be
instrumental throughout implementation. Approach to key areas are:
>» Client Contact: Clients rely on access to Horizon data for detailed transactional
information, this access will remain. The settlements team daily provide one of
five template word documents with summarised volume and value. These are
emailed (or faxed) to clients alongside the bank transfers. This part of the
process will simply be replicated and improved as the process moves to our CFS
system.
>» Settlement Data: Almost 80% of the 440 clients settle based on Post Office
data, hence will successfully migrate into our proposed standard process. Some
of larger clients, by value, require upfront payment (e.g. predicted Santander
account transactions) or using their data (e.g. Camelot); in these cases, our
approach will be to engage and move them to our new process with manageable
exceptions. These are the expected areas of concern as there are some case
where a win-win improved process won't be found and we will have to determine
mitigation plans.
> Fall Back Plan: In all cases it is possible to migrate the current settlement
process as-is. The current process involves creating payments that are not
system-linked to sales then reconciling manually to demonstrate that accounts
are balancing. In the case that we cannot move to a more automated process
for some contracts, they can continue to run on a similar approach in CFS as
they do today in POLSAP.
12.The program will be governed by the Post Offices’ “One Best Way” methodology
and in line with the IT strategy focus on incremental delivery, retaining control,
avoiding large spend commitments and building skills into the retained team.
13.The delivery plan shown below provides an initial view on the projects required and
their timelines.
> Transformation Base State — up front technical prerequisites, basic master
data and design principles
> Sales Transaction Related - the transformational changes dependant on
first processing sales transactions: settlements, invoicing, agent
remuneration, profitability analysis and reporting. Planned to be delivered
incrementally over time by business unit / product group / type of sales
process e.g. we may first tackle sales of Mortgages, then bill payments etc
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» Other Projects — projects required to deliver the overall transformation aims
and cost reduction but able to run with minimal dependency on the overall
program including: moving financial processes from POLSAP to CFS (e.g.
agents’ debt), moving cash processing functionality from POLSAP to
Transtrack, refreshing our warehouse systems.
2017 : 2018
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar
14.The initial budget drawdown request for 2016/17 is £1.532m (£217k has already
been authorised). Further funds will be requested when the deliverables below for a
project complete and submission is made to move to the next phase.
15.In April 2017 the program will report back on the extent to which we intend to
transform, seeking approval for further funding. Outputs will include the results of a
study into our client agreements and the extent to which we can standardise the
back end processing. And the results of a pilot modelling a truly transformed back
office using SAP to process sales transactions generating settlements, invoices,
Agents’ pay and product profitability. At this checkpoint we will decide whether to
proceed with option 3, or revert to option 2.
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16.Program costs have been modelled with resource and material plans created for each
area of work. In order to validate expected costs Wipro were engaged to provide an
independent view and indicated that the program may cost 5-8% more than our
pre-contingency view: we provided for 25% in the £20m recommended budget.
Cost
Phase (m)
Transformation Base State 25-3
Agents Remuneration 1.5-2.5
Sales Processing 2-2.5
Financial Operations and Procurement 2-25
and Reporting Improvements °
Settlements Re-design 15-2
Supply Chain Cash Systems 3.5-4
Warehouse Refresh 3-3.5
17.Benefits are as set out below:
Benefit Generator Amount Calculation
POLSAP Infra, Support. Licence = +£1,890,163
Remove POLSAP £1,167,686 I Increased CFS Infra, Support & Licence = -£475,334
Increased Transtrack Support & Licence = -£247,143
Removal of CSC common services (printing, authorisations, portal)
£1,130,000 I required to manage multiple SAP environments. With only CFS left
these are not required, and there is no additional OPEX to replace.
Remove SAP Common
Services
SAP extended maintenance charge = +£224,529
SAP extended .
£359,067 I SAP Active Embedded support = +£269,076 (Partial reduction of
Maintenance Charges
£134,538)
Transtrack moves off I oo, a4, I Remove Citrix licence costs = +£75k
Citrix , Microsoft alternative included in current licencing.
Mercia Licence = +£55,000
£310,331 I WCS Licence = +£128,375
Galaxy = +£466,956
Warehouse licence and
support reduction
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Benefit Generator Amount Calculation
New WMS system = -£300,000
Front end App = £-40,000
Non staff costs (£30k paper / £20k postage) = +£50k
Fixed staff costs.» (2. x_~=— PO), = —+HES8.5K
£443,500 I Variable staff costs (2 x $O1 equivalent) = +£45k
Remove Capricorn engineers = +170k
Increase pick efficiency = +120k
Improved — Warehouse
processing
Total I £3,485,584
18.In addition to the benefits above directly attributable to the Back Office
Transformation business case, there is a further £3,089,586 of claimed benefits in
other programs dependent on option 3 being delivered:
>» Online Cash Ordering replaces call centre = £400k headcount reduction
» Decommissioning HR SAP = £2,056,586 licence, infrastructure and support
cost reduction
» FSC process simplification = £633,000 headcount reductions
19.The program will be delivered using the contracted Back Office partner (Accenture).
We will also spend on backfilling Post Office resources and supplementing them with
skilled contractors.
20.The diagram below shows the proposed program organisation grouped by process
and capability. An early deliverable (in progress) is a resource plan highlighting
capability gaps for discussion on where we should hire, contract or buy-in skills.
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LS
sdair Cameron (CFO)
e Vendor
Management
Transformation Director
Client Engagement Sales& Product Agent Cash Stock
Client communications Finance Billing Mgmt Pay Mgmt Mgmt
21.Wipro recently conducted a review of the detailed approach, resource plans and
budget for the program. Their report concludes:
» The approach for the program, desire to simplify through consolidating into
systems already in our landscape and use standard processes is a good one.
» Internal change management should not be underestimated and requires focus
throughout
» The timelines provided were suitable for the program of this size and
complexity, however Wipro believed they could be accelerated (something we
believe would not be possible within the Post Office for our tasks). However
they recommended some additional technical steps and overall believed costs
may increase by 5-7%, which has been taken into account in our figures.
22.The Post Office has faced significant challenges in recent programs and is
implementing a number of the lessons learned from these in this approach.
Lesson Learned
Costs have been budgeted using current program
Incumbent vendor costs should actuals as a guide.
not be underestimated. Key vendors (inc. Fujitsu, Accenture) have been
involved in the approach and budgeting.
Fixed Price Contracts are not
suitable for large scale change
where Post Office is accountable
for external deliveries
The team will be led by Post Office resources backfilled,
with specific capabilities brought in to support. The
majority of delivery will be time and materials against a
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Lesson
Large delivery projects are prone
to failure and lack of oversight
Learned
delivery plan. Fixed price will be used only for items
work entirely within a single vendor's control.
Whilst to achieve the overall aims, a number of projects
are required, these are being broken down into their
smallest component parts, with an approach of
incremental delivery.
What are the key risks to a successful delivery?
39.The tables below contain a brief description of the key risks identified and our plans
to overcome them.
Title Description
The Post Office currently settles
and invoices clients in a multitude
of fashions, providing bespoke
information in many cases. There
Mitigation
Communicate early, take feedback and consult
with client senior stakeholders, to ensure that
the operation teams are instructed to work with
Owner
Angela Van
Den
gives a risk that Post Office will be
running the same financials in
POLSAP and CFS, increasing the
potential of double reporting
revenue, or mis-settling.
is a risk that as we try to
Client impact ; we ty us where possible. Bogerd/Martin
standardise we come into conflict ; ne wi
. Re-negotiate contracts/ways of working with I George/Nick
with client contract, either i
\ ‘ key customers (condition that we need toI — Kennett
jeopardising our relationships or custo ,
' provide clients a decent or better experience).
reducing the effectiveness of the
program.
It is essential to bring core sales
into CFS, this can either be
completed as a big bang (meaning ;
The Finance team will need to outline a plan for
all contracts and settlements . °
dealing with this challenge early in the project.
move together) or incrementally, I 9°311"8 Wit
‘foge' ° During project the financial reporting team will
Concurrent Our view is that an incremental .
; need to demonstrate each month that errors I Financial
Financial approach is overall lower risk for
Y are not occurring. Controller
Systems our organisation. However, this
To ensure the approach is solid there is a plan to
engage our auditors early to agree the
approach.
There
Master
groupings (eg. for Horizon, for
Stock, for Agents Remuneration,
for reporting) and questions
are
data
multiple Product
definitions and
Product Data
An entire work stream for the program will be
dedicated to Product and Branch master data,
offshore support for data cleansing and
manipulation is budgeted.
James D’Souza
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Title
Description
about the master data quality.
Work will be required in order to
create a clean Product Hierarchy.
There is a risk that this will be
more challenging and expensive
than planned.
Mitigation
Should the team be unable to tie together all the
product threads in the organisation a fall back is
to revert to receiving values/products/volumes
into SAP from sales systems, with reduced
controls and checks, leaving multiple product
definitions and hierarchies in our organisation.
Product master governance will be updated
alongside the project to ensure on-going
adherence to the updated approach.
Owner
Cost/Time
There is a risk that the budget and
timeline are not accurate.
As outlined in the transformational principles
section the program is delivering where possible
in incremental chunks, hence timeline and cost
slippage will be visible early enabling corrective
action to be taken.
Wipro reviewed our detailed cost estimate and
resource plan of £16m. During the sessions
(workshops with Accenture, SAP, our back office
departments and technology teams) it became
clear that additional technical steps would be
required. Overall Wipro’s view including upsides
and downsides was that our total costs would be
5-8% higher, this is included within our
requested 25% contingency.
Ben Cooke
Resource
capability and
Business
Focus
The Post Office is undergoing
significant change with a high
number of projects going on e.g.
FS Digital Transformation, EUC
Admin etc. There is a risk that the
required for the
program are not available, or
focus is distracted.
resources
The Back Office team & applications are largely
distinct from front office and FS/POMs activity,
hence digital and Horizon related projects are
not considered to be a major threat (pre-
planning has occurred with Fujitsu for the
Horizon interface and resource will be available
Jan-Mar)
Joint planned the
departments heavily involved and the other
back office programs (SSTP for FSC and
Successfactors for HR).
In Supply Chain where key resources could
potentially have their roles changed through Iris
early discussions have occurred to earmark
critical resource & will be picked up once the
program is funded. Currently all essential team
has occurred with
members identified are remaining within the
Post Office.
Alisdair
Cameron
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BOARD DECISION PAPER
Broadband Customer Acquisition
Author: Alwen Lyons Sponsor: Alwen Lyons Meeting date: 24 November 2016
Executive Summary
Context
The Board were asked by email on 4 November 2016, to delegate authority to the
Chief Executive and Chief Financial Officer to proceed with negotiations and sign a
contract for the acquisition of 78,000 Broadband customers from New Call, who trade
under “Fuel Broadband”.
The Board approved this request by email response and the negotiations have started.
The Board’s delegation now requires formal ratification.
Input Sought
The Board is asked to ratify the decision by the Board to delegate authority to the Chief
Executive and Chief Financial Officer to proceed with negotiations and sign a contract for
the acquisition of 78,000 Broadband customers from New Call, who trade under “Fuel
Broadband”.
Strictly Confidential
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POST OFFICE PAGE 1 OF 2
BOARD
Post Office Limited Sealings
Author: Alwen Lyens Meeting date: 24 November 2016
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1454 to 1461 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1454 to 1461 inclusive in the seal register
is hereby confirmed.
Strictly confidential
POST OFFICE LIMITED
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Date Register of Sealings Company Number
24.11.2016 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
1454 / Deed of 21/10/2016 19/10/2016 Deed of Surrender and Release relating to a lease of premises known as Jane MacLeod Jean Reynolds
Surrender 9 Higher Road, Urmston M31 1AA. Robert Graham Trustees Limited and
Post Office Limited.
1455 / TRI 31/10/2016 26/10/2016 I TR1- 35 The Broadway, London, NW7 3DA Jane MacLeod Jean Reynolds
1456 / Licence 31/10/2016 27/10/2016 License to Install Air Conditioning Equipment relating to Land at the Rear I Jane MacLeod Jean Reynolds
of 113 Baker Street London W1 I
4457 /Surrender 02/11/2016 28/10/2016 Deed of Surrender of Lease: Post Office, Market Place, Chesterfield S40 I Victoria Moss, Deputy Company Jean Reynolds
of Lease - TR1 1TL-TR1 Transfer of whole registered tite (Title no. of property Secretary
DY410908) Full tile guarantee. Transferor is POL and Transferee is
Trillium (RMF) Limited.
1458 / Lease 02/11/2016 01/11/2016 Lease Renewal of 72 High Street Hoddesdon, Hertfordshire, between Victoria Moss, Deputy Company Jean Reynolds
Renewal Nicola Trigg and Graeme Ross Atkinson as Executors for Elizabeth Secretary
Fowler (1) and Post Office Limited (2) for a further § years. (Underlease)
14597 10/11/2016 08/11/2016 I Reversionary Lease by reference to an existing lease relating to Ground I Victoria Moss, Deputy Company Jean Reynolds
Reversionary Floor and Basement, 354 and 356 Edgware Road, London W2 1BG Secretary
Lease between Simpsons Paints Limited (Landlord) and Post Office Limited
(Tenant),
1460 I Deed of 10/11/2016 08/11/2016 Deed of Variation relating to Ground Floor and Basement, 354 and 356 I Victoria Moss, Deputy Company Jean Reynolds
Variation Edgware Road, London W2 1BG between Simpsons Paints Limited Secretary
I (Landlord) and Post Office Limited (Tenant). I
1461 / Renewal 14/11/2016 11/11/2016 Renewal lease by reference to an existing lease between Makan ‘Alwen Lyons Jean Reynolds
lease
Investments Limited (a company registered in Jersey 76832) (Landlord)
and Post Office Limited (Tenant) in respect of basement and ground floor
premises at 124 Deansgate, Bolton (as per the existing lease dated 9 May
2006). Term: 5 years with effect from 9 May 2016. Rental: £40,000 per
annum exclusive of rates and VAT to be paid quarterly in advance
Register of Sealings
Alwen Lyons
Page 2
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POST OFFICE PAGE 1 OF 7
POST OFFICE BOARD
Performance Review —- Health
and Safety
Author: Martin Hoperoft Sponsor: Martin Kirke Meeting date: 24" November 2016
Executive Summary
Context
1.1 Keeping our employees healthy and safe is fundamental to Post Office success.
This is reflected in the Post Office Board’s legal responsibilities - directors can be
personally liable when health & safety duties are breached and members of the
board have both collective and individual responsibility for health and safety.
1.2 Our Health & Safety performance has improved significantly in the past 5 years
and we have a rolling 3-year plan to drive health and safety compliance and risk
reduction. The key risks of driving and robberies are the subject of mitigating
activities. Our reporting and safety management system is measured against the
externally recognised health and safety standard - OHSAS 18001. We recognise
the importance that wellbeing can play in creating engaged and motivated
employees and have developed and implemented an extensive wellbeing plan.
1.3 The aim for 2016/17 is to continue the year-on-year improvement by targeting a
reduction in four key safety metrics: accidents; lost time accidents; days lost; and
personal injury claims.
Questions this paper addresses
2.1 What is going well across health and safety and what is not going so well?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
2.3. Are there any significant emerging risks?
Health &
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Conclusion
1. Performance continues to remain strong against all four of the key health and
safety metrics, including absence accidents and lost days (see Appendix).
2. There is an appetite from the Group Executive and across the business as a whole
to improve awareness of health and safety performance, management
responsibilities and compliance. The Health & Safety Team and Property
Management Team are attending many meetings and workshops to support and
provide guidance and training.
3. Mitigating actions are working to reduce road risk and the risk of robberies. (see
Appendix)
4. Recent environmental training has highlighted that POL may not be following best
practice in the way we address environmental issues across the business and
that Post Office Environmental Strategy and Policy could be strengthened.
The Head of Health & Safety has set up a focus group, also involving Property
team, the Social, Action and Inclusion Manager, and legal team to address
ownership, governance and best practice. A report, with recommendations, will
be provided to the GE H&S Sub Committee and Risk and Compliance Committee.
5. Following a recent Property Compliance review, it has been highlighted that
additional training is required for ‘Person in Charge’ (PICs) in Directly Managed
branches to improve their competence and awareness. Managers are completing
basic online PIC training with additional training workshops being arranged
between Jan - Mar 2017 by the Head of H&S and Property Compliance Manager.
6. Following a ‘deep dive’ H&S session with the GE, it was agreed that the Director
of Employee Relations & Engagement and Head of H&S provide executive
awareness training to GE Members during Nov and Dec 2016.
Input Sought
We ask that the Board to note the current safety and wellbeing performance, risks
highlighted and mitigating activity.
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What has gone well across Health & Safety
e ‘Accident’ and ‘lost time’ incidents have reduced at P6 2016/17 when compared
to September 15/16 and are meeting the continuous improvement target of 5%
year on year reduction. (see appendix)
e Current road risk performance has also improved when compared to 2015/16
with ‘at fault’ incidents remaining 32% lower than 2015/16.
e Whilst the number of CViT violent incidents have increased compared to
2015/16, robberies have remained low in August and September (following the
slight increase in July). 2 out of 15 incidents have incurred injury.
«The risk profile of Supply Chain will change due to the current restructure and
changes in workload, delivery routes and relocation will potentially increase risk
through change management activity resulting in distraction. The Health & Safety
team are attending the weekly Iris programme and work stream meetings to
provide support, including risk assessments, training and support visits to sites.
e Accidents involving customers at Crown and hosted branches are investigated,
reviewed to identify any preventative measures and benchmarked. Current volume
remains very low with fewer claims from customers. Analysis is being undertaken
and will be shared at the December GE H&S Sub Committee meeting.
e The volume and value of personal injury claims has reduced with provision for
known unsettled claims also reducing to £602k at Period 7 (October).
e Mental health related conditions are the single most common cause of longer
term absence with 17% of occurrences and 31% of total absence days, a slight
increase at P6 2016/17. Analysis is being undertaken to understand which areas of
the business may benefit from additional ‘mental health awareness’ training. There
has also been an increase in the number of users of the online ‘Help’ Employee
Assistance and Lifestyle Online websites possibly in response to recent increases in
absence but also awareness of resources. (See Appendix)
e Attendance levels have reached 96.8% YTD at P6 (September 2016/17) and
remain on target. However, there has recently been an increase in the level of
absences in Crowns but a decrease in Supply Chain. (See appendix)
e Three Wellpoint™ health check kiosks have been utilised across all largely
populated sites (>25) during the first half of the year with very positive feedback.
Mobile health checks will be offered by the Health & Safety team to Crown branch
and Network Field team colleagues from November.
* Property - Health and safety related risk and facilities management have been
assessed as medium risk, reducing to low by year end. This follows a programme
of checks, inspections and closure of risk assessment actions in accordance with
Health and Safety at Work Act and is now virtually complete.
Health & Safety R
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Overall property risk has reduced from high to medium and expected to be low by
year end, mainly due to the recent focus on completion of technical risk assessments
by CBRE and completion of actions by the Crown Office and Supply Chain lead and
area management teams, supported by H&S and Property teams. Additional training
will be provided in workshops to Persons in Charge (PICs) from January 2017.
e Hosted Sites —- we have a duty of care to our employees working within ‘hosted’
premises eg. WH Smiths. A trial is under way to involve Trade Union H&S Reps in
site meetings prior to transfer date, to support the local managers / project
managers in respect of planning and advice. The Head of Health & Safety is in
contact with the WH Smiths H&S Manager to develop relationships, understanding
of the H&S processes and support available to local Post Office Managers.
What has not gone so well?
e¢ Property - The most significant area requiring improvement has been managing
fire risk, as reported by CBRE to the Property Compliance Board as a finding from
their risk assessments. High risk fire actions have been closed with medium and low
actions planned to be closed by November.
e Customer Harassment - Concern was raised by the Westminster local authority
regarding Post Office Policy for dealing with violence and abuse by customers,
especially in London where there is a growing problem with the homeless population
and their presence in our branches.
Positive recognition has been received from the Environmental Health Officer in
Westminster for the way Post Office has effectively managed this emerging risk in
the London Crown branches. Consideration is currently being given for sharing with
Postmasters and signposting them to the Health & Safety Executive for support and
guidance.
2,2 What are we doing to mitigate the key risks, including
driving and robberies?
e Road Risk: Driving activities have the potential for high impact/loss and
therefore remains one of the more significant residual risk which is successfully
being mitigated through a number of ongoing initiatives. Following a restructure
of the Fleet Management Team, Head of H&S and National Fleet Manager are
continuing to support the Road Risk Consultation Forum to ensure appropriate
plans and actions in place to mitigate emerging trends and risks eg. initiative to
capture signatures from all colleagues who drive for work that they have received
and understood the policy and instruction alongside licence checks.
e Robbery Risk: Robberies have the potential for high impact/loss and remain a
significant residual risk. We are successfully mitigating this through a number of
initiatives and best practice. Ongoing monitoring of the risk profile will inform
the assessment of the need, or otherwise, of body armour.
e Safety Risk: Concern raised with GE at the deep dive session that mobile
phones are being used by Business drivers, including joining conference calls.
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Policy and guidance issued via a communication in August, reiterated by Senior
Management during September. There needs to be strong leadership and
empowerment for employees to challenge anyone on a call who may be driving
and further discussion is planned for the GE Exec Coaching sessions in November.
e¢ Property Risk: Remedial work for all identified high risk items has been
completed and plans for addressing medium risk electrical, asbestos, building
fabric and legionella have been built and are being undertaken.
Health and Wellbeing: We recognise the benefits that wellness can bring to the
organisation and therefore there is an extensive programme of healthcare
interventions to all areas of the business.
e The Health & Safety team are working closely with the Communications team
to support a plan of activity to further raise awareness of the resources available
to colleagues, including comms, blogs, video and face to face workshops.
« A programme of wellbeing activity, including raising awareness of mental
health conditions, symptoms and the support available has been updated.
¢ The roll-out of a second programme of health checks to all employees via face-
to-face clinics and stand-alone digital wellbeing kiosks will continue from Nov.
e Work is currently being undertaken to evaluate the link between local
engagement scores with Wellbeing, analysing absence data and the
engagement index and wellbeing scores, with focus on mental health related
absence in particular. Conclusions and a proposed plan of action will be shared
with the GE H&S Sub Committee in December.
2.3 Are there any significant emerging risks?
e The Environmental Policy, plan and level of reporting is currently under review.
A Strategy Tactical Group has been set up by the Heads of H&S and Property, the
Compliance Manager and CSR Manager, supported by legal and FM provider
guidance to review strategy. The first group meeting took place on Nov 1%. POL
directors will be made aware of the significance of environmental reporting, how
it is affecting our brand image, the potential for personal liability with further
discussion at the GE H&S Sub Committee in December.
e A significant gap has been identified in the competence of managers to carry out
their Person in Charge (PiC) responsibilities and a revised on-line training product
has been developed and issued by the H&S Team, with a requirement that all PiCs
complete this by September. Follow up H&S training workshops will be provided to
PiCs and deputy PiCs, covering Premises H&S, Site Log Books, Fire Extinguishers.
(Appendix Attached - Performance Charts)
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APPENDIX - Summary of Safety Performance - YTD Period 6 (2016/17)
All Accidents ~ YTD Cumulative at Period 6
250
200 I A :
LC .
2 150 -
3 _ ame
= 100 a aoe
Se s le :
: a
50
ee
scenes Period (Apr - Mar)
P2 P3 P4 P5 P6 P7 PB PO P10 Pit PI2,
[2086 ar a 2016017 aN 2018/16 Absence 2016)17 Ansence
‘Accident’ and ‘lost time’ incidents have reduced 12% and 50% respectively at Period 6 YTD (September
2016) compared to 15/16
Grown Office Accidents YTD Pé
Supply Chain Accidents VFO P6
Netw Crow Ofer To Dae Prof of erent
ee ee ee es ee ee
Sup CaP ost
Days
100 ee
P7 PB Pe PIO PIT
PI P2 P32 P4 PS PE
Period
P12
[ais anew]
Current road risk performance has
‘Re fault’ incidents are also down by
31.58% P6 YTD (Sep).
Lost Time injury Frequency Rate
Supply Chain
YTD PS ~ 0.636
2015/26 out turn ~ 2,042
2026/17 target ~ 0.930
Post Office ~ Employes
YAO PS ~0.210
2015/16 out turn— 0.370
2016/17 target ~ 0.350
PO Benchmark ~ 0.480
Post Office CViT Robberies ~P6 (Sep16
Incidents ~2 (2 successful] vs 4 in 15/16 (1
successful)
Violence ¥FD ~ 16 vs 3 (15/16 YTD)
Injuries YTD ~4 vs 0 (15/36 YTD)
‘Weapons YTD ~ 6s 1 (15/16 YTD)
2CVIT incidents were in Birmingham
Post Office (All branch types} Robberies ~
6 (Sepi6)
Incidents - 9(5 successful] vs 7 (5
successful) in 2015/16
Violence YTD - Os 2 (2015/16)
Injuries YTD ~Ovs 2 (2015/26),
‘Weapons YED - 10 (5 firearm) vs 11 (3,
firearms} fast year. One incident in
September resulted in a £16k loss, where
the SPMR was forced to open the safe by
three suspects wielding machetes.
improved by 20.19% compared to 2015/16.
Strictly Confidential
Post Office Board-24/1 1/16
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APPENDIX - Summary of Wellbeing Performance - YTD Period 6 (2016/17)
Sick Absence %ge
2016 / 2017
Aprit I May I june I 3uly I Aug I sep Gross
Period I Period I Period I Period I Period I Period I Y.T.D I Hours
ot o2 03 04 05 o6 _I Totals _I Target
FINANCE 3.5% I 3.2% I 3.4% I 3.5% I 2.9% I 2.8% I 3.2% I 3.5%
FIN: SUPPORT SERVICES (ALL) 4.6% I 3.3% I 3.2% I 3.0% I 2.8% I 3.1% I 3.3% I 3.8%
FIN: SS FSC 3.9% I 2.6% I 2.4% I 2.8% I 3.4% I 1.6% I 2.7% I 3.4%
FIN: SS CONTACT CENTRES 8.4% I 4.5% I 4.2% I 3.6% I 2.2% I 3.6% I 4.3% I_6.7%
FIN: SS HRSC 2.4% I 3.4% I 3.8% I 3.1% I 3.9% I 4.8% I 3.5% I 2.6%
FIN: SUPPLY CHAIN 3.4% I 3.4% I 3.6% I 3.9% I 3.2% I 3.0% I 3.4% I_3.7%
SALES & NETWORK 3.3% I 3.0% I 3.1% I 3.6% I 4.0% I 4.2% I 3.5% I 3.2%
SN: CROWN SALES 3.7% I 3.4% I 3.3% I 4.0% I 4.4% I 4.6% I 3.9% I 3.5%
SN: SALES DIRECTOR 3.9% I__2.5% I 3.2% I 3.0% I 2.5% I 2.6% I 3.0% I 2.9%
PEOPLE & ENGAGEMENT 1.6% I 1.7% I 1.3% I 1.1% I 0.6% I 1.9% I 1.6% I 1.1%
PE: COMMUNICATIONS & CORP
AFFAIRS 0.0% I 3.4% I 3.1% I 3.1% I 0.2% I 0.0% I 2.0% I 0.3%
GENERAL COUNSEL 0.3% I 0.4% I 0.0% I 2.9% I 1.3% 0.6% I 0.8% I_1.8%
GC: SECURITY 0.2% I 0.1% I 0.0% I 2.4% I 2.5% I 1.2% I 1.1% I 1.9%
[ rtwancrat seavices Lice% I 2.1%] 22% I 21%] 1.6% I 1.6% I 1.7% I_2.0% I
[Post office ura [3.2% [2.0% I 3.0% I 3.4% I 3.4% I 3.5% I 3.2% I 3.3% I
Trends - Attendance levels have reached 96.8% YTD at P6 (September 2016/17)
and remains on target. However, there has been a recent increase in the level of
absence in Crowns but a decrease in Supply Chain which has helped the overall
business performance. (See chart above)
Network & Sales absence levels have increased over the last quarter and risen above
target (overall sick absence 3.5% v 3.2%). We have seen an increase in Crown Office
long term absences (2.2% LTS up to 3.3% in recent months). Analysis is being
undertaken with the Occupational health partner to understand underlying trend by
geographical areas.
Supply Chain absence reduction is mainly due to a reduction in long term absences
wither by a return to work or exit from the business. (2.2% LTS down to 1.6%).
Activity -
e Mental health conditions remain the single most common cause of longer term
absence with 17% of occurrences and 31% total absence days, a slight increase
at P6 2016/17. Awareness training continues to be rolled out to all teams.
e There has also been an increase in the number of users of the online ‘Help’
Employee Assistance and Lifestyle Online websites possibly in response to
recent increases in absence but also due to improved awareness of resources.
POST OFFICE
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PAGE 1 OF 1
Post Office Limited Board Meetings
Author: Alwen Lyons — Meeting date: 24 November 2016
Executive Summary
Context
The Directors are requested to note the future meetings dates scheduled in respect of
Post Office Limited Board meetings.
Input Sought
The Board is requested to note the future meeting dates.
The Report
Hate rime otes
Tuesday 31 January 2017 09.30 - 14.00
Tuesday 28 March 2017 09.30 - 14.00
Thursday 25 May 2017 11.15 - 15.30
Tuesday 27 June 2017 TBC Board Away Day 1
Wednesday 28 June 2017 TBC Board Away Day 2
Tuesday 25 July 2017 11.15 - 15.30
Tuesday 26 September 2017 09.30 - 14.00
Tuesday 31 October 2017 09.30 - 14.00
Thursday 23 November 2017 11.15 - 15.30
Board November 2016